An Employer Identification Number, or EIN for short, is basically a social security number for your business. Like with social security numbers, the IRS uses EINs to track what businesses need to certain types of tax. However, not all businesses are technically required to have an EIN as sole proprietorships can be identified by the owner’s SSN instead. That doesn’t mean, though, that you should avoid filing for one, as there are three main reasons why obtaining an EIN is important for a small business.

It allows the business to hire employees.

If you run a sole-proprietorship and you are the only employee that works for the business, all of the profits and losses are going to be reported as part of your personal income. You then pay whatever state and federal taxes you need to, just like you would if you received an income from anywhere else. However, when you hire an employee, you are responsible for withholding any necessary taxes from that employee’s income. The IRS then cannot simply use your SSN to keep track of what they are owed as there are now two different employees, and that’s where the employer identification number comes in. EINs let the IRS and other tax-collecting bodies know what businesses need to be sending in the usual payroll taxes.

An Employer Identification Number is less sensitive than your Social Security Number.

Your social security number in the wrong hands can mean identity theft, and having to spend a few weeks cleaning up the mess left behind. We use our social security number for a lot of important, personal matters, and thus have to keep it fairly well protected. An Employer Identification Number, on the other hand, is only used as a federal identifier, so it doesn’t really matter who knows it. So instead of putting your SSN on form after form after form, it is smarter to just apply for an EIN and use that from the get-go.

It is legally required for most business structures.

When you form an LLC or incorporate your business, you are turning it into its own, separate legal entity. Just like how everyone has to have a SSN, every business entity is required to have an EIN. You also have to have an EIN if your run your business as a partnership, as there are two people involved with the company and you cannot use both SSNs as identifiers. If you ever think that you would possibly want to form an LLC or incorporate sometime in the future, it is a good idea to apply for an EIN early on so you have one when you need it.

Even if you do not need an Employer Identification Number now, you will probably need one in the future. Applying for one near the start of your business may seem like you are jumping the gun, but it is such an essential part in keeping your business compliant with tax law that getting your EIN early on is actually a really good idea. An EIN will never expire, and once it is issued to a business, will not be re-issued. When you are ready to apply, head over to the IRS website and fill out form SS-4 or, if you’d like help, we’d be happy to give you a hand!

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