4 Benefits of an EIN for Professional Consultants
Self-employed consultants come in all different types of forms, spanning many industries. Many consultants opt not to work for large firms, but instead choose to operate solo, either from an office or from their homes. The precise number of private consultants in the U.S. is hard to narrow down, but considering approximately 16.5 million people in the country are self-employed, it is fair to say a good percentage of them are likely to lend their expertise to other individuals and organizations.
All businesses, large and small, must pay taxes. To do so, a tax ID must be used. Small one-person operations can choose to use their Social Security number (SSN), but most will need a business-specific tax ID called an employer identification number (EIN). In this article we will answer What is a tax ID/EIN and the many benefits of obtaining one for your business.
1. An EIN for Professional Consultants Offers a Layer of Protection from Identity Thieves
Did you know having an EIN could offer protection against your SSN being exploited by identity thieves? Tax ID theft is an ongoing issue in the U.S. that doesn’t seem to be relenting anytime soon. Every year, millions of Americans become victims of identity theft, costing victims a collective billions per year.
By obtaining an EIN, you immediately get stronger protection from persistent identity thieves. Consultants who choose to operate without an EIN as their tax identifier, will be required to use their SSN and publicize it on required documents so they can get paid by their clients.
Depending on the scope of your business and if you work for one company or many, this could equate to dozens or more entities you are handing your SSN to. Every entity is at risk, but you have no way of knowing who is stringent on cybersecurity and who might be lackadaisical about it.
Any one of these entities can experience a hack or other type of data breach, putting you at risk. Essentially, for every client who pays you, you will need to entrust them with your SSN.
2. Establishes Level of Professionalism/Generate More Work
Using an SSN tends to give off an amateurish view, since using it as a tax identifier makes it look like the professional is doing work as a hobby or, at minimum, not taking their business as seriously. It demonstrates to clients they haven’t taken the steps to formally get a business tax ID.
Obtaining an EIN for professional consultants can elevate your professional reputation. Others who you work for or with, will likely view your business as more credible once you supply your EIN so you get paid and receive your 1099-NEC each tax year.
In the long run, establishing yourself as an expert in your field with a credible business, is likely to lead to you generating more work, thus earning more revenue for your business. Clients may be more inclined to hire you, especially larger organizations that need an expert to fill a gap or niche they don’t have the internal staff to fill.
3. Strengthen Your Company’s Financial Standing
As a consultant, you may rent office space, use a home office, work in the field, or meet with clients virtually. Whatever business model you use, chances are you will need funding at some point, whether it is to buy office supplies, business equipment, lease a company vehicle, or pay for travel costs. Additionally, for many good reasons, you want to set a clear line between your personal and your business financial transactions.
It’s also worth noting that most businesses will be legally required to obtain an EIN, but consultants who operate as a sole proprietor probably will not need one. Exceptions where an EIN is required include:
- Registering a business as a partnership
- Registering a business as a corporation
- Registering a business as an LLC
- Hiring employees (even just one person)
- Opening a Keogh plan for retirement
Get a Business Bank Account
If you are already in possession of an EIN, it will be a lot easier to get a business bank account so you can deposit payments and pay bills. This also helps you establish a clear separation of your personal and business financial transactions.
If you register your consulting business as a single-member LLC, you will need this separation, or else you risk losing the financial and legal protections being an LLC offers or possibly face a costly and time-consuming audit. Being a single-member LLC is a scenario where you definitely want to avoid blurring the line between your personal and business bank accounts and transactions.
Open a Business Credit Card
If you need a business credit card, you will most likely have to supply the lender with an EIN (not always but the majority of the time a bank will require one). This will also help you establish business credit, separating it from your personal credit score.
Better Access to Favorable Business Loans
In the event you want to expand by adding one or more employees or getting bigger office space, you will likely need access to cash. Your EIN and credit standing will help you gain better access to favorable loan terms. While a bank may or may not require an EIN, the process is much quicker with one. Plus, if your business has its own established credit, you are more likely to be approved.
4. Access to More Retirement Options
If your own consulting business is your full-time occupation, and you are your own boss, you will not have access to an employer-sponsored retirement plan. This means taking the steps to establish your own retirement savings so you can live comfortably later in life.
If you have an EIN for professional consultants, you have more options for ways to save for retirement. The EIN gives you the ability to set up an individual 401(k) since the business tax identifier is a requirement for this type of account. You can also open a SEP-IRA to help bolster your retirement savings. Technically, you do not need an EIN for a SEP-IRA, but some financial institutions will require you to have it. Best to be prepared.