An Employer Identification Number, also called an EIN or a Federal Tax Identification Number , is a unique set of digits assigned to a business by the IRS. With it, tax agencies can easily track the financial activity of your company, and make sure that you pay your taxes. employer identification numberBut, if you run a sole-proprietorship, the IRS can already do that using your personal social security number. So in what cases do you need an Employer Identification Number?

When you hire someone

The only time you can really get away with using your social security number is when your business is considered a sole-proprietorship, and you’re the only employee. The IRS figures, in cases like that, the company’s profit flows directly to you, and you pay your taxes from that. But that changes the minute you bring anyone on to help run the company, and that includes a business partner. Once you start hiring, your company must have an EIN.

When you form an LLC or Incorporate

Incorporating or forming an LLC separates you and the business. Since the company is its own, legal entity, and you are its employee, it needs an EIN so that the IRS can track the business and make sure it is collecting payroll tax and, in the cases of certain corporations, its own tax. It is also important to note that in these cases you need an EIN, even if you are the only person working for the company.

When you don’t feel like giving out your social security number

Your social security number is tied inextricably to your identity. And, if the wrong person gets ahold of it, they can wreak havoc on your life. Identity theft is a serious problem – one you want to avoid at all costs. It makes sense, then, to get an EIN for your business so you don’t have to give out your social security number every time you need to identify your business.

Chances are good that, at some point, you will hire someone and wind up needing an EIN. Getting one sooner, rather than later, will make running your business much less complicated. The IRS actually allows you to file for an EIN, for free, online. And, if you aren’t comfortable with that, you can hire an outside service to help you out. Either way, it’s a good idea to get an EIN early on in your company’s life since having one helps protect your personal identity, and will streamline any interaction you have to have with the IRS.