Tax ID Numbers And Freelancers: What You Need To Know
Do I need to pay taxes as a freelancer? Do I need an EIN as a freelancer? Any business operating in the U.S. needs to pay taxes – this is no different for freelancers.
The Internal Revenue Service (IRS) uses Taxpayer Identification Numbers (TIN) as a way to identify individuals in the execution of tax laws. A Taxpayer Identification Number may be issued either by the Social Security Administration (SSA) or by the IRS.
Your Social Security Number (SSN) is issued by the SSA, whereas other Tax ID Numbers are issued by the IRS. As a freelancer, you may either use your SSN or EIN to file taxes.
What Is An EIN?
An Employer Identification Number (EIN), also known as a Federal Tax ID Number, is a unique identifier for business entities, similar to that of SSNs for individuals in the United States. EINs are issued by the IRS and allow the IRS to easily identify businesses and track their tax responsibilities. They are made up of nine digits, formatted as XX-XXXXXXX. EINs are commonly used by employers for tax reporting purposes.
Businesses can apply for an EIN directly through the IRS. Business entities must apply for an EIN by phone, online, fax, or mail before they can begin operations. You must have an EIN if you:
● hire employees
● operate as a corporation or partnership
● file a select list of tax returns
● withhold taxes on income paid to non-resident aliens or any other income other than wages, or
● are involved with a number of types of organizations such as trusts, estates, non-profits, and more.
So as a freelancer or independent contractor, where do you fall on this spectrum?
Do Freelancers Need An EIN?
You may be wondering, “Do I need an EIN as a freelancer?” First things first, a freelancer is a sole proprietor. They produce goods or services on their own without hiring any employees.
Most business structures need an EIN, but as a sole proprietor, there is slightly more flexibility. Technically, freelancers who operate on their own do not need an EIN. If you are a freelancer, you do not need an EIN to file taxes as you can just use your SSN.
With that said, should you get an EIN as a freelancer conducting business in the U.S.? There are many benefits to obtaining an EIN as a freelancer – let’s go over why you should.
Why Should Freelancers Get A Federal Tax ID Number?
As a freelancer, it is beneficial for you to obtain an EIN for several reasons. For starters, a Federal Tax ID Number that is separate from your SSN will allow you to have a different identification number that can be used solely for your business tracking purposes, potentially limiting the risk of identity theft.
An EIN is also useful for opening a business bank account which could make it easier for you to manage your finances. Having a business bank account will allow you to make and receive payments relating to your freelance business into a bank account that is separate from your personal finances.
Getting an EIN for freelancers is also helpful for filling up W-9 forms should you go into any work that is worth more than $600. Once again, this will allow you to share an identity number for tax reporting purposes that is separate from your SSN. This is especially helpful if you are wary of sharing your SSN with businesses or clients that you only have one-off projects with.
How Can I Get An EIN As A Freelancer?
It is easy to apply for an EIN as a freelancer. The EIN application can be done directly through the IRS over the phone, online, by fax, or by mail. The method through which you apply depends on your location and resident status. (Only businesses located in the U.S. or U.S. territories can apply for an EIN online.)
Applying for an EIN is fairly easy and uncomplicated. To start, you will need to fill out Form SS-4: Application for Employer Identification Number which you can find on the IRS website. You will be required to share some information with the IRS.
First, you will need the name of your company’s principal officer, partner, trustor, owner, or any other title, along with their personal taxpayer identification number (that is, your SSN). Additionally, the application asks for the type of entity you are running, the reasons for applying for an EIN (such as registering a new business, change of organization, or IRS withholding requirement compliance), the start or acquisition date, and the principal industry of business.
Once all the information provided in the online application has been validated, your EIN will be provided immediately or within the hour. Applications by fax or mail can take from 2 to 4 weeks to be processed.