There is usually a lot of administrative work to do in the early days of running a small business. It’s tempting to ignore it and dive headfirst into expanding your new business, but this might lead to serious problems later.
If you’ve just launched a new small business, one of the most important first steps is to obtain a business tax ID number. Here’s what you should know about them, why they’re important, and how to get one.
What Is A Business Tax ID Number?
A business tax ID number is a nine-digit code that is used to identify your company. To perform numerous administrative tasks, such as completing your annual income tax returns and creating a business bank account, you must supply one.
Contrary to popular belief, there are several sorts of business tax ID numbers. The three primary possibilities are as follows:
- Social Security Number (SSN)
- Individual Taxpayer Identification Number (ITIN)
- Employer Identification Number (EIN)
If you were born in the United States as an American citizen, the Social Security Administration (SSA) should have assigned you an SSN at birth. Permanent residents and qualifying non-immigrant workers can apply for one later in life from the SSA.
If you are a resident or non-resident alien and are not qualified for an SSN, you must usually apply for an ITIN instead. They are issued by the Internal Revenue Service (IRS), as opposed to SSNs.
SSNs and ITINs identify individual taxpayers. Sole proprietors, on the other hand, can use them as their business tax ID numbers as long as they do not hire staff. Sole proprietorships are business owners that conduct their operations in their name without forming a separate legal corporate entity.
EINs, unlike SSNs and ITINs, are only used by businesses. The IRS may require you to utilize one depending on the conditions of your firm. They are, nevertheless, the most practicable solution for all business owners, including single proprietors without staff who are not compelled to have one.
Using an EIN instead of your taxpayer ID to conduct business operations decreases the possibility of identity theft. Furthermore, it aids in the separation of your personal and corporate credit and demonstrates the validity of your organization to third parties. To obtain one, submit a request to the IRS using your SSN or ITIN.
People also read: How to Determine Whether a Business Name Is Available
Federal vs. State Tax ID Numbers
SSNs, ITINs, and EINs are all federal tax identification numbers. That is, they are issued by the IRS, a government entity, and are primarily used to identify your company when filing federal tax returns.
You may also need to obtain a second state tax ID number depending on your firm’s location. For certain state-specific tax concerns, these serve the same role. Because the requirements vary by state, consult a CPA or other tax specialist for clarification on the restrictions in your area.
When Do Businesses Need An EIN?
Fortunately, the Internal Revenue Service (IRS) provides a brief questionnaire to assist you in establishing whether you need to use an EIN as your business’ tax ID number instead of an SSN or ITIN:
- Do you have employees?
- Do you operate your business as a corporation or a partnership?
- Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco, and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Trusts (except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns)
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers’ cooperatives
- Plan administrators
If you responded yes to any of these questions, you must utilize an EIN as your small business tax ID number, according to the IRS. If you don’t know the answers to some of the above questions, consider consulting a Certified Public Accountant (CPA).
How To Get An EIN
Whether you are required to obtain an EIN or simply want one for the benefits it provides, the IRS makes the process reasonably simple. It also offers the service for free, so be wary of anyone who requests payment to complete the process.
Check your eligibility before submitting a request. To apply for an EIN, your company must be based in the United States or a U.S. territory. In addition, you must have a valid taxpayer identification number, which is often an SSN or ITIN.
If you match these conditions, the IRS digital application is the simplest way to obtain an EIN. There is no option to save your progress and return to it later, so you must complete the process in one session.
Fortunately, the application is not difficult. Prepare to provide the following information about yourself and your company:
- Your full name and SSN or ITIN
- The business name, if different from your own
- The business address in the United States
- Your reasons for requesting an EIN
- The business’ legal structure or organization type
- Your number of employees and the date of the first wages paid
- The business’ principal activity and primary product or service
You should be able to complete the application in a matter of minutes, after which you will obtain a PDF copy of your EIN letter. It will include your EIN as well as other crucial information about the number. Make a copy of it for your permanent records.
If you can’t or don’t want to complete the application online, you can download and fill out IRS Form SS-4, then fax or send it to the IRS. For faxed and mailed applications, the processing time is four days and four weeks, respectively.
Apply For A Small Business Loan
Even if the IRS does not mandate it, one of the key reasons to obtain an EIN is to aid in the application process for small company loans. Financial institutions and internet lenders are frequently reluctant to make loans to businesses that do not have one.