Employer Identification Number (EIN): 5 Reasons You Should Get One + How To Do It
If you are serious about your business, you need to have an Employer Identification Number (EIN). It’s a critical part of your business foundation but many business owners are often confused by the EIN.
In this article, I’m sharing everything you need to know about the EIN. I will tackle frequently asked questions like “What is an EIN number used for?” and “How to get an EIN number?” as well as share the five main benefits of having an EIN.
And if you don’t already have an EIN, I will also share how to get one for free, so keep reading!
What is an EIN?
First things first, what is an EIN? EIN stands for Employer Identification Number (so let’s stop saying EIN number…?) and it is used by the IRS to identify a business for tax purposes. That’s why the EIN is also known as a Federal Tax Identification Number.
You can think of the EIN as a Social Security Number for your business. Much like how your Social Security Number identifies you as an individual, your EIN is tied to your business entity.
Contrary to its name, you do not have to be an employer to get an EIN. As long as you have a business, you are eligible to get an EIN.
Should You Get an EIN?
As a tax specialist, my answer to this is always a resounding YES. If you are a business owner and take your business seriously, an EIN is a must-have for your business.
Now, just because you should have an EIN for your business doesn’t mean that it is a requirement. Technically, if you are just starting out and running a sole proprietorship, you don’t need to have an EIN for your business.
However, having an EIN for your business has many practical, legal, and tax applications. For most business owners, getting an EIN is a simple and logical step in laying the foundations of your business!
Why Do You Need an EIN?
In 2021, over 51,000 victims fell prey to identity theft using their Social Security Number (SSN). When fraudsters have access to your SSN, they can easily take out fraudulent loans in your name, max out your lines of credit, leave you with tons of debt, and even collect refunds in your name.
But what does this have to do with the EIN?
If you are operating as an independent contractor, you have to file Forms 1099 or W9 for services. Without an EIN, you would have to fill out these forms using your SSN. Doing this opens you up to becoming a potential victim of identity theft.
However, once you have an EIN, you can use this instead of giving out your SSN to every service provider you work with. You can protect your private information, identity, and assets by keeping sensitive information confidential.
Having you been running your business finances out of your personal bank account? Not only does it make keeping track of your finances confusing and complicated, but it is also a huge red flag for the IRS when you file your taxes.
This could land you in all sorts of trouble like getting audited, having your tax deductions rejected, and more!
Save yourself the hassle and separate your personal and business bank accounts. To do that, you will need an EIN to open a business bank account.
Setting up a business bank account with your EIN will also provide limited personal liability protection – which means that your personal assets are protected if your business runs into financial difficulties.
As your business grows, you will quickly realize that you cannot do it all. Running a business involves a lot of moving parts and many of them (such as bookkeeping, copywriting, social media management, and web design) may not be in your wheelhouse.
When you hire employees to perform functions for your business, you will need to set up payroll. To do this, you will need an EIN. Depending on your state, you may also need to apply for a state tax ID. Without an EIN, you will not be able to hire any employees and this may hinder the growth and momentum of your business.
Your business may be doing well with cash flow right now, but there may come a time when you need to take out a loan or get financing for your business. In this situation, it is important to have good business credit.
To start building credit for your business, you need to have an EIN. Additionally, it can take 12-18 months to reach a position of good credit, so getting started on this sooner rather than later is the best strategy.
Whether you need some extra cash to hire additional staff as your business grows or to cover regular expenses in a difficult season, having built up good financial credit for your business will give you more leeway to manage your numbers.
5. Taxes & Licenses
The EIN is used by the IRS to track your taxes, so you will need this number to report and file your taxes. LLCs and S Corps are required to file business or corporate taxes using the EIN. Even for sole proprietors, the IRS states that the EIN is necessary “if you’re required to file any of these tax returns: employment, excise, fiduciary, or alcohol, tobacco, and firearms”.
Additionally, if you are required to apply for any business licenses to run your business, you will need the EIN. Not having an EIN can lead to delays or additional obstacles in obtaining the required licenses to run your business legally.
Tip: If there is a change in the business entity or the owner of the business, you are usually required to apply for a new EIN.
Do You Need an EIN?
Despite all these benefits, you may still be wondering if you need an EIN if you are just starting out. Luckily, the IRS has implemented an excellent system that can provide a thorough assessment to check if you need an EIN.
By answering a series of Yes/No questions, you can easily determine whether you need an EIN. Find out if you need an EIN by clicking here.
How to Get an EIN for Free
Getting an EIN from the IRS is a simple process that is free. It is a one-time process and applications for the EIN can be submitted online, by fax, mail, or telephone. If you use the online service, once you submit your application, you will immediately be issued the EIN for your business.
Wondering what information you need to apply for an EIN? You will need to prepare and have all the information contained in Form SS-4 on hand to complete the application.
Set Up Your Business Foundations
The EIN is just one element of the financial foundation of your business. If you want your business to be able to grow to 5, 6, 7 figures and beyond, you will need to get the rest of your financial foundations in place too!
Not sure where to start? Book your VIP Week to get the finance side of your business set up, organized, and ready for success. With 1-on-1 personalized attention and laser-focused strategy, you’ll have your financial foundations set up in no time. Schedule your VIP week now!