An EIN is one of the first things you need when starting a business, but many people are unsure whether they actually need one or how to get it. Here is everything you need to know.
What an EIN Is
An Employer Identification Number (EIN) is a nine-digit number assigned by the IRS to identify your business for tax purposes. Think of it as a Social Security number for your business. It is formatted as XX-XXXXXXX and is used on tax returns, bank account applications, and when hiring employees. The IRS also calls it a Federal Tax Identification Number.
Who Needs an EIN
You are required to have an EIN if you have employees, operate as a corporation or partnership, file certain tax returns (employment, excise, or alcohol/tobacco/firearms), withhold taxes on income paid to a non-resident alien, have a Keogh plan, or are involved with trusts, estates, real estate mortgage investment conduits, nonprofits, or farmer cooperatives.
Even if you are not legally required to have one, there are good reasons to get an EIN voluntarily. Sole proprietors can use an EIN instead of their Social Security number on W-9 forms, invoices, and business accounts. This reduces the exposure of your personal SSN and helps establish your business as a separate entity in the eyes of banks and vendors.
How to Apply (It Is Free)
The IRS does not charge anything for an EIN. Apply online at IRS.gov using the EIN Assistant -- it takes about five minutes and you receive your number immediately upon completion. The online application is available Monday through Friday, 7 a.m. to 10 p.m. Eastern Time.
You can also apply by fax (Form SS-4, response within four business days), by mail (four to six weeks), or by phone if you are an international applicant. The online method is by far the fastest and easiest. Be cautious of third-party websites that charge fees to file on your behalf -- the IRS application is free and straightforward.
When You Need an EIN
- Opening a business bank account: Most banks require an EIN to open a business checking or savings account, even for sole proprietors.
- Hiring your first employee: You need an EIN to report employment taxes and issue W-2 forms.
- Forming an LLC or corporation: Multi-member LLCs and all corporations need an EIN. Single-member LLCs technically can use the owner's SSN but should still get one.
- Filing partnership or corporate tax returns: Forms 1065 and 1120 require an EIN.
- Applying for business licenses and permits: Many state and local applications ask for your EIN.
EIN vs SSN for Business
A sole proprietor without employees can legally use their SSN for business tax purposes. However, using an EIN instead keeps your SSN off invoices, contracts, and vendor forms. It also reduces your risk of identity theft. If a client or vendor experiences a data breach, your EIN being exposed is far less damaging than your SSN.
Getting an EIN does not change your tax obligations or create a separate legal entity. A sole proprietor with an EIN still reports business income on Schedule C of their personal return. For actual liability protection, you need to form an LLC or corporation -- the EIN alone does not provide that.
Important Details
Each business entity gets one EIN. If you change your business structure (for example, from sole proprietorship to LLC), you generally need a new EIN. If you simply change your business name or address, you keep the same number. An EIN never expires and cannot be reused or reassigned to another entity once issued.
Bottom Line
An EIN is free, takes five minutes to get, and is required for most business activities beyond solo freelancing. Even if you are not required to have one, it protects your SSN and makes your business look more professional. There is no reason not to get one.