“In this world, nothing can be said to be certain except death and taxes!”
Benjamin Franklin
These words hold even today, especially for new business owners who face the daunting challenge of getting their finances in order. One important step in setting up a business is obtaining an Employer Identification Number, or EIN. Just as death and taxes are inevitable, acquiring an EIN is vital to ensure proper financial organization and compliance with government regulations.
What is an Employer Identification Number (EIN) or Tax ID?
The tax identification number of a business, commonly known as an Employer Identification Number (EIN) or Federal Tax ID Number, operates like an individual’s Social Security Number. The EIN, issued by the IRS, is a distinct nine-digit number formatted as XX-XXXXXXXXX and contains details about the State in which the company is registered. As per IRS Publication 15 (Circular E), the EIN serves the purpose of identifying businesses and facilitating tax reporting; thus, it must be included in all business tax filings
When is EIN Required?
Only businesses based in the United States are eligible for an EIN. Regardless of the number of employees, anyone can apply for an EIN, including LLCs, sole proprietorships, government entities, partnerships, nonprofits, and other organizations.
According to the guidelines provided by the IRS, obtaining an EIN is mandatory under the following circumstances:
- The business employs staff members.
- The business is structured as a corporation or partnership.
- The business prepares tax filings related to employment, excise, alcohol, tobacco, and firearms.
- The business administers a Keogh plan.
- The business collaborates with qualified trusts, estates, non-governmental organizations (NGOs), farmer cooperatives, or plan administrators
Why does a business need an EIN?
Here are some of the reasons and benefits of obtaining a business tax ID:
Avoid tax penalties by filing business taxes
When paying taxes, an EIN is a unique identifier for a business or organization. It aids in separating business and personal funds, simplifying tax filing, and reducing the chances of an audit or confusion. However, not having an EIN by tax day may cause complications because the business owner must fill out special documentation to alert the IRS, which may be rejected and result in fines for a late return.
Avoid identity theft
Identity theft is rising, especially as more corporate transactions are conducted online. Acquiring an EIN can help protect against identity theft by separating the personal Social Security number from the business finances. While intercepting an EIN is still possible, the implications would be significantly less severe because it would be much more difficult for fraudsters to open a bank account with just an EIN.
Increase the business’s credibility
Credibility is crucial for every firm to succeed, and establishing such confidence necessitates providing all legal requirements, including the EIN. Obtaining an EIN indicates that the business is legitimate, registered, and compliant with tax and regulatory laws.
This improves the business’s reputation and makes creating relationships with new clients less challenging by distinguishing the business as a trustworthy and credible corporate organization.
Open a business bank account
Using an EIN, business owners can establish an independent bank account for their company. Most banks will require an EIN to create a company checking or savings account, even for sole proprietors. However, the owner must provide additional information beyond just the EIN to open a business bank account. This includes the date the firm was formed, the location of the business, the business’s legal name, and the owner’s personal information.
Establish business credit
Another benefit of having an EIN is establishing a strong business credit history. Similar to personal credit history, it takes into account the company’s track record of bill payment and financial responsibility. Moreover, the company will have a commercial credit report, and to maintain an excellent rating, all payments must be made on time.
Accelerate business loan applications
Funding is a primary concern for every business, particularly small firms, and loans such as SBA Loans, including a business acquisition loan, are a popular way to secure the necessary capital. Having an EIN increases the chances of securing a company loan and expedites the process because lenders view the EIN as proof of creditworthiness.
Having an EIN permits the business owner to open a business bank account, facilitating efficient management of financial transactions and ensuring the borrower can receive loans and make periodic loan payments.
Employees can be hired quickly
The IRS requires business owners to obtain an EIN before hiring any official employees for their business. It allows recording salaries, deducting and transmitting payroll taxes, and meeting tax responsibilities as an employer.
Methods for Applying for the Tax ID (EIN)
There are multiple channels to apply for an EIN:
Online
The online application is the most common and preferred method to apply for EIN. USA business owners with a valid taxpayer identification number (e.g., SSN) can apply for the EIN online from Monday to Friday, from 7:00 a.m. – 10:00 p.m. EST.
The validation process will be conducted during the online session, and an EIN will be issued immediately. Most importantly, the Online EIN application sessions expire after 15 minutes of inactivity. Also, if the business owner previously obtained an EIN online, they cannot apply online again; instead, they must apply via fax or mail.
Fax
Business owners can use fax to apply for the EIN by completing Form SS-4. Download the form, fill out all the required information, and answer the questions, then use the following fax numbers to file the Form SS-4:
- (855) 641-6935
If your principal business, office or agency, or legal residence is located in one of the 50 states or D.C., use these numbers
- (855) 215-1627 (within the U.S.)
- (304) 707-9471 (outside the U.S.)
Usually, it takes four business days to receive a fax containing the EIN.
Those not in a hurry and prefer mail can use the same Form SS-4 and mail it to the following mail address within the U.S.
- Internal Revenue Service, Attn: EIN Operation, Cincinnati, OH 45999.
Usually, the processing time for mail applications requires four weeks to get the EIN.
Phone
The phone application is available only for international applicants. They can call the phone number: 267-941-1099 from 6:00 a.m. to 11:00 p.m. EST, Monday – Friday, to obtain EIN. And the applicant must answer the same questions in Form SS-4.
Online Applying for the Tax ID Number (EIN) Steps
The online application offers an easy and immediate way to obtain an EIN, and it includes the following steps:
Go to the IRS website
To start the application, go to the IRS online EIN application web page, scroll down to the bottom, and click the “Begin Application” button.
Identify
The first step is identifying the business’s legal structure, such as LLC, corporation, etc. So, it’s important to register the business before starting the EIN application and gather all the related information which must be provided in the application’s next step.
This information includes the registered business name, business entity type, the business mailing address, the State, the formation date, and the name of the person responsible for the business, among others. Once the business entity is selected in the application, click “Continue.”
Tip
The IRS website explains most terms in the EIN application. These terms will be colored in blue and underlined; click on them to see the definition.
Provide information about the members
If the business is registered as an LLC, the IRS will require the applicant to provide information about the members (owners) of the business. The IRS taxes LLCs differently depending on the number of business members. If there is only one member, the LLC will be taxed similarly to a Sole Proprietorship. However, if there are two or more members, the IRS will tax it as a partnership. Therefore, it is important to provide accurate information as required and then click the “Continue” button.
State why you are requesting an EIN
The next step is stating the reason behind applying for the EIN. The available choices in the online application are:
- Started a new business
- Hired Employees
- Banking Purposes
- Changed Type of Organization
- Purchased Active Business
Determine the business’s contact person
IRS will require the applicant to designate a contact person who will be addressed all tax issues and filing. For LLCs, the IRS will require a primary member and principal officer for corporations, and the business owner must provide their full Information such as name and social security or individual tax identification number.
After completing the information, click “Continue.”
Provide the business’ location
No matter the type of business entity, the business owner must provide the business’s physical address, which must be within the U.S., in addition to a valid phone number.
Tip
The business address must not exceed 35 characters and doesn’t contain punctuation except for a hyphen and a backslash.
State the business’s legal name
The business’s legal name will be determined during the registration process, and the same name must be provided in the IRS application. Additionally, the applicant needs to provide the county and State where the entity is located, the State where the articles of organization are filed, and the start date of the entity. Once all the prompted information is provided accurately, click “Continue.”
Indicate any federal excise taxes and select the business category
The next step includes questions about vehicles, gambling, quarterly federal excise tax returns, and alcohol, tobacco, and firearms. Make sure to read and answer all the questions, then click continue. Afterward, choose the best category from the drop list that describes what the business does, then click continue.
Choose how to receive the confirmation letter
After the application is completed, a confirmation letter will be sent online or by mail. So, select the preferred way to receive it and click “Continue.”
Tip
An online confirmation will be sent immediately, but when choosing the mail confirmation, it will be sent to the mail address provided previously, and it might take up to 4 weeks.
Verify the information
The final step is verifying all the information; the last page of the online application will demonstrate a summary of the provided Information. So, read it all and correct what needs to be corrected, as the application can’t be edited after submitting it. Once you are sure about all the Information, click “Submit.”
Federal Tax ID FAQs
Here is a list of frequently asked questions about EIN:
How long is an EIN valid?
The EIN will remain valid as long as the business is running.
How long does it take to get an EIN?
It depends on the application method
- The EIN will be issued immediately for online applications.
- The EIN will be issued in 4 business days for a fax or phone application.
- The EIN will be issued in 4-5 weeks for mail application.
When does a business need a new EIN?
The business needs a new EIN if the business’s type, ownership, or structure changes significantly, such as incorporation, beginning or ending a partnership, and entering bankruptcy proceedings.
Does it cost money to get an EIN?
Applying for the IRS is free, and thanks to the online application, the business owner can apply for it and get it immediately. However, it can cost money for legal services if the business hires an agency or law firm to apply for the EIN.
How to get an EIN if it gets lost?
If you have lost your Employer Identification Number (EIN) and need to retrieve it, contact the IRS Business & Specialty Tax Line at 1-800-829-4933. Explain that you have lost your EIN and provide them with the necessary information about your business, and they will assist in retrieving the EIN.
Our Final Thoughts
In conclusion, obtaining an Employer Identification Number (EIN) is vital for small businesses to ensure proper financial organization and compliance with government regulations. The EIN serves as a unique identifier and facilitates tax reporting for businesses.
It is required for businesses that employ staff, are structured as corporations or partnerships, prepare tax filings for various purposes, administer certain plans, or collaborate with specific organizations. Acquiring an EIN offers several benefits, including avoiding tax penalties, protecting against identity theft, increasing credibility, opening a business bank account, establishing business credit, and expediting loan applications. Applying for an EIN can be done through various methods, such as online, fax, mail, or phone. It is important to provide accurate information and retain the EIN for future reference.
