Apply for a Sole Proprietor Tax ID (EIN) Number
Does a Sole Proprietor need a Tax ID (EIN) Number?
Does a Sole Proprietor need a Tax ID (EIN) Number?
Yes, Sole Proprietorships need a Tax ID for:
- Hiring Employees:
If a Sole Proprietor will have employees they are required to have a Tax ID (EIN).
- Opening a Business Bank Account:
To open a business specific bank account, a Tax ID (EIN) is required.
- Working with Vendors
Certain vendors will not do business with Sole Proprietorships that do not have a Tax ID (EIN). Sole Proprietors that sell items to the public are required to get a Tax ID (EIN) number.
Sole Proprietor IRS Definition
A sole proprietor is one individual who owns a company that is not incorporated or registered with the state as a limited liability company (LLC). Sole proprietors may or may not have employees.
In a sole proprietorship:
- The business does not exist separately from the owner.
- The risks of business apply to the individual’s personal assets, including those not used for the business.
- The sole proprietor reports business income on his or her individual tax return.
SOLE PROPRIETOR FREQUENTLY ASKED QUESTIONS
An EIN Number (also called a Tax ID) stands for Employer Identification Number. Most people consider an EIN Number like a Social Security Number (SSN) for a business. The IRS requires most businesses to obtain this nine-digit number in order to identify the business for tax purposes. Some advantages of getting your Tax ID / EIN Number include the ability to open a business bank account or line of credit, hire employees, or apply for certain business licenses.
An EIN is required for many reasons for businesses, taxable entities, and non-profit organizations. If any of the following apply to your business or entity you will need an EIN:
– Hiring Employees
– Operate your business as a Corporation or Partnership
– If you will file any of the following tax returns: Employment, Excise or Alcohol, Tobacco and Firearms
– Have a Keogh Plan (a retirement plan for sole proprietors or self-employed)
– If you’re involved with any of the following organizations/entities:
— Trusts (except certain grantor-owned revocable trusts)
— Real Estate mortgage investment conduits
— Non-profit organizations
— Farmers’ cooperatives
— Plan Administrators
A sole proprietorship EIN is not a requirement since individuals can use their SSNs. With that said, it is highly recommended that you obtain one when starting or forming your business/organization for many reasons:
– Use your EIN instead of your SSN on business applications and licenses to protect your personal information
– Many state and local permits require that you have an EIN
– An EIN is required to open a business bank account
– EINs help to establish business credit history
– Minimize delays when you decide to hire employees
Every EIN application requires that a person who is a principal officer, general partner, grantor, owner, or truster be designated as the primary point of contact and responsible for receiving correspondence from the IRS related to the entity. This person is called the “responsible party” by the IRS. This person controls, manages, or directs the applicant entity and disposition of funds and assets. If there is more than one responsible party for the entity, please list the primary person that you would like the IRS to recognize as the responsible party.
Under the current revised version of the IRS EIN application, a responsible party is defined as:
“For entities with shares or interests traded on a public exchange, or which are registered with the Securities and Exchange Commission, “responsible party” is (a) the principal officer, if the business is a corporation, (b) a general partner, if a partnership, (c) the owner of an entity that is disregarded as separate from its owner (disregarded entities owned by a corporation enter the corporation’s name and EIN), or (d) a grantor, owner, or trustor if a trust.”
“For all other entities, “responsible party” is the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets. The ability to fund the entity or the entitlement to the property of the entity alone, however, without any corresponding authority to control, manage, or direct the entity (such as in the case of a minor child beneficiary), does not cause the individual to be a responsible party.”
Does a sole proprietor need an EIN? Theoretically, the answer is no, as we’ve established that a business does not exist separately from its owner. That means that the owner can use their SSN or individual taxpayer identification number to conduct business as a sole proprietor.
However, if you still wish to apply for an EIN so that you can hire employees or file taxes for your retirement plan, you can do so.
To start the application, you’ll need certain information about your business, including your legal name, Social Security Number (SSN), business address, and other relevant details. You can apply online, by fax, or by mail.
We recommend hiring a third-party service like us to handle the EIN application process. We will communicate with the IRS on your behalf, simplify the application, and provide 24/7 support to business owners like you.