EIN and Tax ID: Why Every Business Owner Needs One

Launching a new business can be an exciting experience for any aspiring entrepreneur. However, this process comes with a long list of requirements. From forming a business entity to opening a business bank account, there are many things to check off before starting your operations.

One important yet often misunderstood step in forming a small business is obtaining the right tax identification number (TIN). Many new entrepreneurs wonder whether they need a TIN, an employer identification number (EIN), or both.

So, to help you, we’re explaining the difference between an EIN and a tax ID.

Below, we’ll explore the purpose of each tax identifier and when to use them. We’ll also explain the step-by-step process of obtaining an EIN and a tax ID.

EINs & Tax IDs: What’s the Difference?

It’s very common for new entrepreneurs to confuse EINs and tax IDs with one another. Although both identifiers are used for tax purposes, they serve different functions and meanings.

A tax ID number (TIN) is an umbrella term that refers to various tax identifiers issued by the government. These include:

• Social Security Number (SSN): The Social Security Administration (SSA) issues this tax ID to individuals, single-member limited liability companies (LLCs), and sole proprietorships.
• Individual Taxpayer Identification Number (TIN): The IRS issues this tax ID to individuals who cannot obtain SSNs, such as non-resident aliens, spouses, and other residents who are not eligible for an SSN.
• Employer Identification Number (EIN):  Issued by the IRS, an EIN is primarily used to identify businesses.
• Preparer Tax Identification Number (PTIN): Any enrolled agent representing taxpayers to the IRS, such as certified public accountants (CPAs) and attorneys, must have a PTIN.
• Adoption Taxpayer Identification Number (ATIN): This tax ID is a temporary taxpayer identifier issued to individuals interested in adopting a child.

In contrast, an employer identification number (EIN) is a tax ID issued to businesses, estates, trusts, and other legal entities for tax purposes.

While all EINs are considered tax IDs, not all tax IDs are EINs. Understanding this distinction is crucial for obtaining the right tax ID.

Who Needs An EIN?

According to the IRS, a business needs an EIN if it:

• Has employees.
• Operates as a multi-member LLC, corporation, or partnership.
• Files employment, excise, alcohol, tobacco, and firearms tax returns.
• Involved with several organizations, including but not limited to trusts, estates, and nonprofits.

Importance of Obtaining A Tax ID

Tax IDs, such as EINs, are mandatory for various business functions, including:

Incorporating

Incorporating your business as an LLC, corporation, or partnership requires obtaining an EIN from the IRS. You will need this tax ID to report and file your income taxes.

Hire Employees

Businesses that want to hire employees need an EIN to manage payroll taxes and file forms like W-2s and 1099s. These forms are primarily used to report employee earnings and salaries paid to independent contractors.

Open a Business Bank Account

An EIN is also required to open a business bank account. Most banks will ask you to provide your EIN certificate alongside your business’s formation documents when opening a new business account.

Build Business Credit

Your business will also need an EIN to build business credit. A good business credit score will help your venture secure credit lines, loans, and vendor accounts.

Applying for Business Licenses & Permits

Another crucial function that requires EINs is applying for business licenses and permits. Most states and local jurisdictions will ask you for a valid EIN when you apply for a license.

How to File For A Tax ID

Below is a step-by-step guide on how to file for a tax ID, specifically an EIN:

Determine Your Eligibility

First, you must ensure that your business needs an EIN. As mentioned, EINs only apply to businesses with employees or are structured as corporations or partnerships.

You can check the criteria listed on this blog or visit the IRS resource library to determine whether your business is required to obtain an EIN.

Gather Your Information

Once you confirm your business’s eligibility, gather all the information you’ll need for the application. These include:

• Your business’s legal name.
• Your business’s legal structure.
• Your name and SSN or ITIN.
• Your business’s physical location.
• Your business’s nature and its date formation.

Complete Your Form SS-4

Form SS-4 is the primary document you’ll use to apply for an EIN, which can be found on the IRS website.

Once you download it, make sure you fill it out accurately. Any errors in your application could result in delays or even rejection. So, before you submit your Form SS-4, double-check your entries.

Choose a Filing Method

There are three ways to file your Form SS-4: online, by fax, and by mail.

• Online: The fastest and the most popular way of getting an EIN is through the IRS EIN assistant. Go online and visit the IRS website. Once there, complete the form and wait until your application is approved. Afterward, you will receive your EIN.
• By Fax: If your principal place of business is in one of the 50 states or the District of Columbia, you can fax your Form SS-4 to 855-641-6935 or 855-215-1627 if it doesn’t have a principal office. Fax submissions typically take four business days to process.
• By Mail: If you decide to mail your application to the IRS, you will receive your EIN in four to six weeks.

How Much Does It Cost to Get An EIN?

It’s important to note that EINs are free. The IRS will not charge you anything if you apply for one, so be cautious of sites that charge a fee for EIN applications.

Get Your EIN Today

Getting the right tax identification is a crucial step in business formation. Whether you need an SSN or an EIN, the right tax ID ensures that your business is legally compliant and ready to operate.

If you need help setting up your new business, NCH has you covered!

NCH specializes in business formation. Our team of business formation specialists will assist you in launching your dream business. From getting your tax ID to drafting an operating agreement, we’ll handle all the hard work so that you can focus on what matters most: setting up your business for success.

To learn more, visit our website here or call us at 1-800-508-1729 to schedule a free consultation to get started with your LLC formation. 

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.