An Employer Identification Number (EIN) is a unique nine-digit tax identification number given by the IRS to businesses, organizations, and other entities for filing taxes and reporting purposes. This EIN works as a federal tax identification number which you will need to pay federal taxes, hire employees, create a business bank account, and apply for business licenses and permits.
When Is An EIN Required?
An EIN comes in handy when you are hiring employees, operating as a partnership/corporation, filing tax returns, or withholding taxes from income other than wages. Bear in mind that all business owners of all types of business entities (except sole proprietorships) must apply for an EIN.
Obtaining an EIN is the first crucial step for business owners as it provides an advantage for your business operations and financial management. If your business is one of the following legal structures, you should consider applying for an EIN:
● Non-profit organizations (NPOs)
The IRS does not consider the size of a company when issuing EINs, so even if you only have one employee, you are still eligible to apply for an EIN. Sole proprietors need not apply for an EIN, but they may do so if desired.
Advantages Of Getting An EIN
In general, applying for an EIN separates your business from your personal finances as it simplifies any bookkeeping and accounting processes. You might wonder if you need to renew your EIN yearly: the answer is no. EINs do not expire so you don’t have to get them renewed once you obtain one.
Even if you are not required to apply for an EIN (like sole proprietors, for instance), you might consider acquiring one because sometimes, not getting an EIN may cost you more in the future. Here are some benefits of an EIN number.
Avoid Tax Penalties
An EIN is basically a tax ID number assigned by the IRS for tax obligations. However, if you haven’t already obtained an EIN by tax day, you will not be able to file taxes for your business. You have the option to inform the IRS of this predicament, but this may delay your filing, and result in penalties for late returns. Keep in mind that when you keep accurate records, file, and pay your taxes on time, you are able to avoid tax penalties. Timely record-keeping, timely payment of taxes, and complying with tax laws can help you avoid tax penalties.
Prevent Identity Theft
If you are wondering if an EIN can protect you from identity theft: yes, it can. An EIN separates all personal finances from business finances. Once you have obtained your EIN, you do not need to give your Social Security Number to clients or vendors who you collaborate with. As we all know, your SSN is strictly confidential. Carelessly sharing this information will increase the chances of identity theft and access to your profits.
Open A Business Bank Account & Speed Up Loan Applications
An EIN allows you to speed up loan applications as long as you have all the necessary information to conduct your business. Therefore, you should get an EIN if you are planning to take out a loan. Some lenders may require you to have a business bank account with deposits, which is where an EIN comes in handy. Most banks require business owners to have an EIN in order to open a business bank account. (Note: Some banks allow sole proprietors to open a business bank account without an EIN, but this varies as some have stricter policies.)
Establish Business Credit
Business credit is proof of your company’s track record in timely bill payments and proper financial management. Why should you keep a good credit score?
● It helps in your business loan applications.
● As your business credit increases, you will gain more access to funding for your business (eg: loans, credit cards, and other financing options)
● You can negotiate better payment terms with your customers, suppliers, and vendors.
Let’s say your personal credit score hasn’t been the best. When you use your EIN to apply for credit, it will show up solely on your business’ credit report. This means none of your bad personal credit history will affect your business’ credit score, making way for all the benefits above. Obtaining an EIN will work in your favor in this case.
If you plan to hire employees, then you are required to have an EIN. Can you apply for an EIN even if you have no employees? Yes, you may. It is hard to predict when you might hire in the future but as your business scales and you need to delegate work to a team, getting an EIN earlier could be a good thing. An EIN will ease your hiring process, from setting up payroll to hiring your first employee.
Protects Personal Assets
Obtaining an EIN for your business can help protect your personal assets by establishing your business as a separate legal entity. If a lawsuit arises, your personal assets are protected. However, some personal assets can be at risk if you are unable to pay your business loan or lease which was personally guaranteed by you. Engaging in fraudulent or illegal activities may also hold you liable regardless of your business structure. Overall, while the EIN protects your personal assets, do consider adopting proper business practices or liability insurance to protect your assets and yourself.
How Do You Acquire An EIN?
Now that we’ve illustrated the benefits of an EIN number for your business, you can start applying for one. You can do it yourself on the IRS website, but you don’t have to. We’re here to help.