8 Reasons Why Self-Employed Individuals Should Obtain an EIN

Self-employed contractors come in all different sizes and span across all industries. They may be doctors, dentists, lawyers, general contractors, and various types of consultants, to name a few types of self-employed contractors. Statistics suggest roughly 16.5 million people are self-employed, making up approximately 10% of the total working population.

As is required of all businesses, regardless of size, taxes must be paid. Large companies must obtain a contractor EIN or employer identification number. One-man operations can use their Social Security number when filing their tax returns.

1. A Contractor EIN Provides Stronger Protection from Identity Theft

Contractors operating without an EIN will have to give their Social Security number (SSN) to essentially every customer who pays them, along with vendors, suppliers, and several other entities. Considering every year millions of people fall victim to identity theft, routinely giving out their SSN puts the independent contractor at high risk.

In this respect, an EIN can serve to be a useful tool to help protect yourself against identity theft and tax identity theft. Instead of supplying your SSN on every document requiring a tax ID, simply put down the EIN instead. While a breach of an EIN would be bad, it is far better than having your SSN exposed and exploited.

2. Makes it Very Easy to Open a Business Bank Account

Most financial institutions require business owners to have an EIN before they will permit a business bank account to be opened. While independent contractors can theoretically use their SSNs to open a business bank account or use their personal bank account for business transactions, this is not the best course of action.

Separation of bank accounts also helps safeguard the commingling of funds and risks of triggering an IRS audit. In almost all cases, it is best to separate individual and company accounts. This is especially true for LLCs that risk losing the legal and financial protections this business structure provides if there is no financial separation of accounts.

3. Elevate Your Brand Reputation

As an independent consultant, it is difficult to manage all aspects of your business yourself. Chances are you will need suppliers, vendors, partners, or other business entities that you might need to rely upon their expertise to help you operate or complete a job. This means you will need to share your tax ID with many of them.

If you already have a contractor EIN issued to you, this elevates your brand’s reputation because it makes it look professional. As a result, third parties will be more likely to work with you due to the credibility the EIN lends to self-employed business owners.

Many contractors can legally function without applying for an EIN, but there are specific conditions that would necessitate getting an EIN. If the following applies, your business will need an EIN.

  • Employees are working for your company
  • Your company operates as a corporation
  • Your company is registered as a partnership
  • You opened a Keogh plan for retirement
  • Taxes are withheld for employees who are non-resident aliens

4. Can Help Generate More Work

This somewhat goes hand-in-hand with elevating your brand reputation, but having an EIN can also increase your potential to earn more revenue. Clients may be more apt to hire you, especially larger businesses if you can easily demonstrate you operate as an independent business. Supplying clients with an EIN is an easy way to prove this standard to them.

5. Establish Business Credit

To establish business credit, you should have an EIN before you apply. Business credit card issuers typically require one, although not always. However, shopping around and applying for cards can get time-consuming. Why not simply go for the sure thing and have an EIN ready to include on the application?

Doing so will significantly speed things up and give you an opportunity to separate your personal credit from your business credit. This increases the probability that you can have better access to favorable loan terms and/or not affect your personal credit score if your business runs into financial trouble at any given time.

6. Obtain Easier Access to Business Loans

Many self-employed contractors might use their SSNs to conduct business because they don’t realize the value of a contractor EIN and the many advantages having this type of tax ID affords them. While obtaining an EIN might seem like an additional burden, the good news is that the process is pretty straightforward.

Chances are at some point you will need to raise more money for your contracting business. Whether it’s supplies, equipment, money to expand, or other reasons, you may need to apply for a business loan. While technically, a bank may not require you to have one, the application process is much quicker if you have an EIN in place, since you can easily prove your connection to being a business.

7. Ability to Open Certain Types of Retirement Accounts

As a self-employed contractor, you do not have an employer-sponsored retirement plan, so you will have to rely upon yourself to establish the funds you will need later in life. If you want to set up an individual 401(k), you’ll need an EIN. If you want to establish a SEP-IRA you do not technically need an EIN, but some financial institutions will require one.

8. You Can Hire Employees Any Time You Need

Any business that wants to hire employees must have an EIN. There is no legal way around this. Even if you work solo, there may come a time when you need to hire temporary, seasonal, or year-round part-time or full-time employees.

Once you have your EIN, you can hire workers as you need them without delay. This could prove especially useful if you land a big contract, unexpectedly fall behind on work and need extra hands on board, or need to hire employees to handle certain aspects of your business (e.g. answering phones or doing your books).

The bottom line is that obtaining an EIN is really worth the effort. Once you obtain your new tax ID, you can enjoy the above advantages. You also position your business to be more competitive, able to hire employees, and be ready for expansion, or any other unexpected changes that come your way.

Written by Maurice Mallory