Does a sole proprietor need an EIN?
As a sole proprietor, you are not required to have an EIN. However, there are certain situations where you might need one.
As a sole proprietor, you are not required to have an EIN. However, there are certain situations where you might need one.
As a sole proprietor, the IRS allows you to report business income and expenses on your individual tax returns, which means using your Social Security Number (SSN). However, there are certain situations where you may need to use an EIN. In this guide we look at the circumstances under which a sole proprietorship needs an EIN, how to get an EIN for your business, and the benefits that come with it.
Short for Employer Identification Number, an EIN is a unique nine-digit number issued by the IRS to businesses for identification and tax purposes. It identifies your business as a taxpayer in the same way that your social security number identifies you as a taxpayer. For this reason, an EIN is also known as a Taxpayer Identification Number (TIN).
The nine-digit number on an EIN pinpoints where a business is located and where it needs to file tax returns. Thus, if the business defaults on its federal income taxes, the IRS may use the EIN to track that business down and impose the appropriate interests and penalties.
While incorporated businesses like LLCs, corporations and nonprofits are legally required to have an EIN, sole proprietorships aren’t. As a sole proprietor, the federal government classifies your business as an unincorporated enterprise. Such businesses – which include sole proprietorships, general partnerships and trustees of trusts – are not required to have employer identification numbers. You can, therefore, use your Social Security Number when filing tax returns.
That said, there are conditions under which the IRS requires that a sole proprietorship gets an EIN. These conditions are:
In case you’re not sure and are still wondering if you need an EIN for sole proprietorship, you can visit the IRS website for more information. It provides a questionnaire to help small business owners determine if they need to apply for the nine-digit number.
Generally, even if your business is allowed to operate without it, you stand to gain more in having an EIN than not having one. As you may have noticed, without an EIN, a sole proprietor is not able to:
Beyond those important reasons, an EIN may also be beneficial when opening a business bank account, applying for business licenses, and getting business loans or credit. Therefore, an EIN allows your sole proprietorship to take better business steps.
So, does a sole proprietorship need an EIN? No, unless under certain instances. However, it’s wise to get one anyway for other reasons. Here are the benefits of an EIN to a sole proprietorship business:
Without a business EIN, you’ll be forced to use your Social Security Number on various business applications and documents. By frequently putting your SSN out there, you increase the risk of it landing in the hands of an identity thief.
If that happens, the thief can use your details to obtain credit and even file fraudulent tax returns in your name. You can easily avoid that by getting a business EIN and using it on all business documentation. The added advantage is that you get to keep your SSN private.
There are banks that don’t allow businesses – including sole proprietorships – to open or maintain accounts without an EIN. Such banks will lock you out even if you meet all other qualifications. It, therefore, makes sense to have your EIN at hand just in case your preferred bank requires it.
That said, you don’t need an EIN to open every business account. Nearside, for example, doesn’t require sole proprietors and unincorporated businesses to have an EIN before opening, using and maintaining free business checking accounts. Whether you have an EIN or not, you can easily open a Nearside checking account that comes with no monthly fees, no NSF fees, no minimum requirements, and lots of cash backs.
Having a business EIN means that you won’t have to use your Social Security Number on business documents. You’ll use the EIN instead. By doing so, you essentially separate yourself from the business, thus establishing it as an independent entity and ensuring limited liability for yourself.
While this is important to all small business owners, it is essentially critical to independent contractors who do not want to be considered as employees for tax and liability reasons.
You need a business EIN if you’re looking to build business credit without using your personal credit. This is very important for business growth because it allows your company to qualify for loans, lines of credit and credit cards independent of your personal credit score. Besides, by separating personal credit from business credit, you ensure that business activities don’t negatively affect your personal credit score and vice-versa.
Just as important, an EIN gives your business a professional image and thus credibility. You’ll find it a lot easier to qualify for various types of business loans whenever you need cash injection.
State laws regarding EINs vary from one state to another. While some allow sole proprietors to operate without the nine-digit number, others make it a requirement. In addition to tax purposes, small businesses may be asked to provide an EIN when applying for state and local licenses. Make sure to check the website of your secretary of state to confirm the laws around EINs for sole proprietors.
To get an EIN for your sole proprietorship business, you will need to register the business with the IRS using Form SS-4. You can do this online through the IRS website, by phone or by mail. Whichever option you choose, getting an EIN is completely free. Here’s a step-by-step guide:
You are eligible for an Employer Identification Number under two conditions:
The IRS requires that you submit your personal information such as name, address and Social Security Number. Besides that, the application form will also ask for:
To be sure which documents and information are required, you may want to download and review IRS Form SS-4 before you begin the application process. Keep in mind that you can only apply for an EIN once per day.
As a sole proprietor, you have four options when applying for an EIN: online, by fax, by mail and by telephone.
Applying for an EIN online: this is the easiest and most preferred method of getting an EIN for a sole proprietorship. It involves applying for the number via the IRS website. The online option is available for all businesses whose primary location is within the U.S. or U.S. territories. Head over to the IRS website and fill out the prompt. Remember to choose “Sole Proprietor” when asked to choose the type of legal structure applying for an EIN. Once you complete filling out the form, submit it. You’ll get your company’s EIN immediately.
Applying for EIN by fax: under this option, you will need to acquire and complete IRS Form SS-4, then send it to the IRS by fax. If your EIN is approved, the IRS will send back the nine-digit number by fax within four business days.
Applying for EIN by mail: fill out Form SS-4 and send it to the IRS through the mail. Upon approval, you will receive your EIN via mail within four weeks.
Applying for EIN by phone: this method is reserved for international applicants. If you live outside the U.S. and its territories, you may call the IRS through 267-941-1099 any weekday between 6 AM and 11 PM Eastern Time to obtain your EIN. Note that the number is not toll-free.
Using an EIN for a sole proprietorship offers more advantages than using an SSN. For example, you easily distinguish the business as a separate legal entity and guarantee yourself limited liability. You’ll also find it easier to open a business bank account and access loans and credit facilities. Thus, if you’re looking to grow the business and protect your SSN, personal assets and liability, then it makes more sense to use EIN.
Multiple member LLCs are required to have an EIN. A single-member LLC can operate without an EIN as long as it doesn’t have employees, is not required to pay excise tax and is not classified as a disregarded entity.
The most straightforward method for finding a lost or misplaced EIN is calling the IRS Business & Specialty Tax Line via 800-829-4933 and asking them to search for your business EIN. Besides that, there are other options that you can take as well: