5 Benefits for Counselors/Therapists to Obtain an EIN
The mental health field is a growing industry. According to the U.S. Bureau of Labor Statistics, jobs in this field are expected to grow faster than the three percent average across all occupations between now and 2032. In fact, some specialties falling under this occupational umbrella are projected to grow by a whopping 18% through 2032.
The IRS requires all businesses, regardless of industry or size, to pay taxes. Corporations, S-Corporations, LLCs and certain other small/medium-sized businesses are mandated to obtain a tax ID, which is otherwise known as an employer identification number (EIN). Single-person companies, such as many counselors and therapists, with no employees can opt to utilize their Social Security number (SSN) instead.
1. An EIN Provides Stronger Protection from Identity Theft
According to the latest figures published by the U.S. Bureau of Justice Services, in 2021, one in 10 people became victims of ID theft in the prior 12 months, which equated to approximately 24 million people. Furthermore, roughly one in five people (22%) had previously been victims of ID theft.
Counselors and therapists operating without an EIN will be obligated to provide their SSN on any tax-related documents. Keep in mind, that completing insurance forms requires a tax ID, and out-of-network billing means your SSN will need to go on your client’s superbill, which means more entities than you’d probably like will have access to your personal tax ID.
Even perhaps riskier is due to the recent Transparency in Coverage rule, your SSN could potentially be made public since you will need to include specific information to comply.
2. Simplifies the Process to Open a Business Bank Account
Independent contractors, such as counselors and therapists, are theoretically able to use their SSNs to open a business bank account, but this isn’t always how it works. Most banks and credit unions will require business owners to possess an EIN before they will allow them to open a business bank account.
Some professionals are tempted to simply use their personal accounts for their practice, but this is a bad idea because business and personal funds end up commingling and this can lead to audits and other problematic issues. In almost every situation, it is better to separate personal and business bank accounts.
Additionally, if you have registered your private practice as an LLC, without separation of personal and business funds, you risk losing the legal and financial protections an LLC structure provides.
This can be confusing, because mental health professionals who do not have employees and have not registered their business as a corporation are not required by the IRS to obtain an EIN. However, if the following conditions apply to you, then yes, you would need to apply for a business tax ID.
- You hire one or more employees
- Your company is registered as a partnership
- Your company is registered as a corporation
- Your company is registered as an LLC
- You opened a Keogh plan for retirement
3. Positions Your Practice for Expansion
Many mental health professionals work remotely or out of their homes. Having an EIN positions the practice to be able to expand if it becomes necessary.
You Can Hire Employees
While you might work solo at the moment, there may come a time when you need to hire a receptionist, bookkeeper, or other individual to help you run your practice. By having your EIN already in place, you can hire as soon as the need is evident and not delay while you apply for your tax ID.
You are Able to Get a Business Credit Card
Small businesses can apply for business credit cards to help them pay for the everyday items a company needs. While not all creditors will require an EIN for these cards, some do. This will not only expedite the credit card approval process, it is also a good opportunity to segregate your personal and professional credit scores. This is advantageous in the respect that if your practice runs into financial problems, it won’t affect your personal credit score (and vice versa).
Your Business Gains Better Access to Funding
Having an EIN also opens up financial opportunities so you can expand. For instance, if you need larger office space, new equipment, or funding for other needs to grow your practice, it will be far easier to get the money to support business growth.
When you have an EIN already in place, you’ll have established your practice as an individual entity with its own separate credit rating, separate from your personal one. This means when you apply for a business loan, the application process will be quicker. Additionally, if you already have well-established credit for your practice, you may have access to more favorable loan terms.
4. Elevate Your Professional Reputation
As a private practitioner, it can be difficult to manage everything yourself. While you may not have a need to hire employees, you may need to utilize the services of virtual assistants, accountants, cybersecurity services, or an emergency service line.
Anyone you contract with will need a tax identifier to use on tax forms. Using your SSN can give the appearance of looking amateurish and some businesses might be hesitant to work with you. Furthermore, if your SSN is published for the public to see under healthcare transparency laws, clients will quickly see you do not have a professional-looking EIN.
Additionally, should you decide to convert your sole proprietorship to an LLC (which also looks more professional), you will need an EIN, so it’s beneficial to already have one in place to use on your business structure registration.
5. Ability to Open Certain Types of Retirement Accounts
As a self-employed private practitioner, you will not have access to an employer-sponsored retirement plan. To set yourself up for when you decide to retire, you will need to set up your own retirement funding. To set up an individual 401(k), an EIN is required by the federal government. If you prefer to establish a SEP-IRA, you do not need an EIN, although some financial institutions will require you to have one.