If you are an owner of a business or an organization that has to file tax returns, you may know that you need to apply for a tax ID number. You may have come across the terms EIN and State Tax ID Number, but how are they different and which one applies to you?
In this article, we address commonly asked questions about State Tax ID Numbers vs EIN. By the end of this post, you’ll know exactly which ones your organization needs to apply for.
What Is The Purpose Of Tax IDs?
Annually, businesses operating in the United States are required to pay business tax to the government. This is where tax identification numbers or tax ID numbers come in.
Tax IDs are to businesses what Social Security Numbers (SSNs) are to individuals – they serve to identify the business or organization paying taxes. The IRS needs this number to distinguish one entity from another since they cannot be distinguished solely by their names.
Tax ID numbers exist at the federal level, for federal taxes. We call this the EIN (Employer Identification Number). They also exist on the state level, for… you guessed it – state taxes. We will dive deeper into the differences in this article.
Which Businesses Need Tax IDs?
Now, let’s talk about which businesses need tax IDs and which ones don’t. Just a heads up: we are referring to the federal tax ID, used for paying taxes to the federal government. Every state has unique regulations around state tax IDs, so please check with your Secretary of State.
So, which types of entities need to obtain a federal tax ID? Organizations that hire employees, withhold taxes on income, or file certain tax returns (Employment tax, Excise, Alcohol, Tobacco, or Firearms tax) need to obtain one.
The Internal Revenue Service (IRS) lists these entities as mandatory to have a federal tax ID:
● Limited Liability Company (LLC)
● Non-profit Organization
Sole proprietorships, where the business entity is one with the individual, file taxes using their SSN. This means they do not need to obtain an EIN, even though they can. Filing for an EIN as a sole proprietor or freelancer has its benefits.
Are Federal And State Tax IDs The Same Thing?
You may be wondering, “Is an EIN the same as a State Tax ID?”
They are not the same thing. A federal Tax ID number, which is the EIN, is issued by the IRS for tax purposes. It is also used by banks and licensing bodies. An EIN has 9 digits and is formatted in this way: XX-XXXXXXX.
State tax IDs are issued by the state. This could be the Secretary of State, Department of Revenue, or something else. The format for this number also varies by state. For example, the Texas Comptroller issues an 11-digit ID called the Texas Taxpayer Number. In Colorado, your entity would be given an 8-digit ID called the Colorado Account Number by the Department of Revenue.
As you’ll see, the regulations for State Tax IDs vary by state. We recommend you check with your state when you are registering your business entity.
Do You Have To File State And Federal Taxes?
All business entities need to file some form of federal tax. However, the same cannot be said about state taxes, which again, has a unique set of laws.
Federal Taxes: There are 5 general taxes that a business may need to pay depending on its legal structure. The IRS website explains in detail all of these taxes, but here is a summary:
● Income Tax – Filed annually by all businesses except partnerships.
● Estimated Tax – Filed by individuals, including sole proprietors, partners, and S corporation shareholders.
● Self-employment Tax – A social security and Medicare tax primarily for individuals who work for themselves (freelancers, sole proprietors, etc.)
● Employment Taxes – For businesses that hire employees.
● Excise Tax – Taxes that apply for certain goods and commodities as well as any licenses granted to operate certain types of businesses.
State Taxes: Some states do not charge business tax. For instance, Alaska and New Hampshire do not charge income tax or sales tax. Other states that do not charge income tax include Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
If you are in any of these states, you are exempt from paying state taxes. If you are in a state that does charge income tax, your state’s Department of Revenue or tax website will provide all the necessary information on filing state taxes.
Is An EIN The Same As A Federal Tax ID?
Yes, they are the same. The EIN is also known as:
● Federal Tax ID
● Federal Tax Identification Number
● Federal Employer Identification Number (FEIN)
● Employer Tax ID Number
How To Register For An EIN
To register for an EIN, applicants must fill up Form SS-4 and provide the required information. Click on the directory below to begin applying for an EIN.
Still have questions? Learn More About Applying For An EIN.