In 2020, The Wall Street Journal reported more than 3.2 million applications were submitted for employer identification number (EIN) filings. This marks a considerable leap in federal tax ID filings, compared to 2.7 million filings in 2019 according to the U.S. Census Bureau.
What’s the backstory behind this uptick in EIN filings? Amid the COVID-19 pandemic, many individuals are starting small businesses and embracing entrepreneurship. After incorporating or forming a limited liability company (LLC) for the business, the IRS issues a federal tax ID to identify a business entity. This is an EIN.
Let’s take a look at an EIN’s formatting, the difference between an EIN and a TIN and an ITIN, and how to apply for this tax ID.
EIN Formatting
An EIN shares a few similarities to a social security number (SSN). This number is nine digits long. It is unique and does not expire.
This tax ID may also legally identify a business. Most business paperwork requires an SSN or EIN to identify the company. An EIN acts as a safeguard. It is slightly less sensitive than an SSN, so some entrepreneurs choose to use an EIN to protect their personal identity.
That being said, an EIN is still an important identifier for a small business. Do not leave this tax ID number lying around or keep the number visible in public places. Store it in a safe space and protect it as much as you would a social security number.
What Can You Do with an EIN?
Entrepreneurs that incorporate as corporations, LLCs, sole proprietors, partnerships, and other entity formations may use this tax ID for a variety of purposes. These are among some of the most popular, and common, for EIN use.
EIN Use
- Forming an LLC or corporation. An EIN is issued to entrepreneurs that incorporate or form an LLC from the IRS. If you do not receive an EIN and incorporate as one of these entity formations, you will need to obtain this tax ID.
- Opening a business bank account. Generally, most banks require a certified copy of an EIN before a business may open a business bank account. A business bank account is critical for a small business to keep personal and professional finances separate and to establish credibility.
- Hiring employees. Does your business plan to hire, and pay, employees? You will need to obtain a tax ID first. This is a requirement before hiring employees. It allows the IRS to track your business and ensure it stays in compliance by collecting payroll taxes.
- Establishing a credit profile. An EIN is necessary for establishing a business credit profile. This is separate from your own personal credit profile.
Additional EIN Use
- Establish pension, profit sharing, and retirement plans. As the owner of the business, you may create these plans for employees. You are viewed as a plan administrator and will need an EIN before you may establish these plans.
- Filing annual tax returns. Use this tax ID on these documents when filing taxes! Small business taxes can be complicated and time consuming. Consider leaving your taxes to a Block Advisors small business certified tax pro. Then, you can focus on running your business.
- Changing your organization type. Are you switching from sole proprietorship to an LLC? Changes in entity formation means the ownership of your organization is changing — and you’ll need to obtain an EIN to reflect these changes. For example, a sole proprietor switching to an LLC may be used to using their SSN on business documents. Switching to an LLC allows them to use an EIN and further safeguard their SSN.
EINs, TINs, and ITINs: What’s the Difference?
You might notice other acronyms, like TINs and ITINs, when obtaining an EIN. What do these terms mean? Like an EIN, these are identification numbers issued by the IRS.
A TIN is a taxpayer identification number. It is used by the IRS in the administration of tax laws and may be furnished on tax-related documents. For example, you may use a TIN when filing your tax returns.
An ITIN is an individual taxpayer identification number. It is for U.S. residents or nonresident aliens that must file a U.S. tax return and presently do not have a federal tax ID number. This includes anyone who does not have or is not eligible for an SSN. The IRS will issue an ITIN, a tax processing number with limited functions, to keep individuals in compliance with U.S. tax laws.
How to Apply for an EIN Tax ID
Now that you know what an EIN is and how this tax ID works, it’s time to apply for an EIN. Here’s what you need to know before getting started.
It’s critical that your business understands its EIN eligibility. There are a few primary requirements.
The principal business must be located in the United States or its U.S. territories. You must have a valid taxpayer identification number. This may be in the form of an SSN, an ITIN, or an EIN (if you already have it!). Finally, the business must have a legal formation. If it does not, the IRS advises filing to incorporate or form an LLC for the organization prior to filing for an EIN. If a business is not legally formed, it is possible they may be subject to automatic revocation of their tax-exempt status.
Is there a limit to the number of EIN applications that one may file for? Yes. According to the IRS, only one EIN may be issued to a responsible party per day.
Once you have determined that your business is EIN eligible, start the application process with MyCorporation! We’ll help complete your tax ID application and answer any questions you may have about the filing process.
Filing for an EIN is essential for keeping small businesses compliant with tax laws. Let’s help you obtain this tax ID! Contact us at mycorporation.com or give us a call at 877-692-6772.