Small Business Advice

How to get an employer identification number (EIN)

Getting an EIN number is one step in the process of registering your business. Here's how to do it.

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Registering a business entity involves a long list of processes, including getting an Employer Identification Number (EIN). The number is similar to an SSN (both are a nine-digit number) for personal life but primarily for business-related items. 

As a business owner, an EIN is helpful to open a bank account, file federal tax returns, or apply for licenses. Getting an Employer Identification Number may appear complex, but the process is easy to understand with just a few steps. 

How to Apply for an Employer Identification Number (EIN)

When applying to get an EIN number through the IRS, the cost of the application is free. When processing the EIN, It’s advisable for business owners to stay away from companies that charge for it. Here are the steps to follow in applying for an Employer Identification Number (EIN).

  1. Eligibility for an EIN

When applying for an EIN or federal employer identification number, there are two primary requirements. The business should have a central U.S location, and the individual should have a valid taxpayer identification number.

For every potential business owner, factors like the business’ main income-generating activity and physical location determine the principal business. Examples of income-generating activities include engineering, medicine, and auto repair professions.

It’s crucial to note that providing services outside the United States doesn’t mean an individual doesn’t qualify for an EIN. However, businesses should have their primary activities in the United States.

The person who applies doesn’t need to be the business owner during the application. Applicants can be partners or significant officers of the company — as long as they classify as a “responsible party.” According to the Internal Revenue Service, a responsible party is an individual in charge of the company’s finances.

  1. Get Important Information & Tax ID Number

Important information like your personal tax id number (SSN) and the SS-4 Form is essential to have for your application for an EIN. Reviewing the SS-4 Form helps applicants get necessary information like addresses, names, and the Social Security Number (SSN).

The applicant needs to know what type of business entity they have and if it’s a corporation. If it’s a corporation, the applicant needs to put down the incorporated state or country. On the other hand, the responsible party needs to know the number of members if it’s a multi-member LLC.

Some other vital information the responsible party should have includes:

  • Primary industry, including a description of a significant product or service.
  • Closing month of accounting fiscal year
  • First date of wages payment
  • The major reasons for applying include banking purposes, launching a business, and hiring employees.
  • Date of acquiring business
  • The most number and types of employees to expect within 12 months
  • Any business license that helps identify that your business is legitimate 

  1. Apply Online or By Fax or Mail

According to the IRS, the responsible party can apply online, by mail, telephone, or fax. Some applicants located in the United States that may choose to immigrate to the United States may apply by phone. Note that using the phone is one the fastest methods for applicants based in the U.S.

  • Online Application: Using the internet, the EIN online application is highly preferable for customers to obtain an EIN. After applying, it gets validated and issued to the company. The online method is acceptable for entities whose primary business, legal residence, or office is within the United States.

  • Fax Application: After properly completing the Form SS-4, taxpayers can fax it to the right fax number. If it’s imperative that the entity needs a new EIN, the government will assign one using the appropriate procedures. If the taxpayer provides the fax number, the fax gets sent back with the EIN/federal employer identification number within four business days.

  • Mail Application: An EIN application via mail takes a month, and it’s one of the longest and least utilized methods by many in the United States.

  • Telephone Application: When registering via telephone, the individual should be able to receive an EIN and answer questions relating to the Form SS-4. For the final authorization to be valid, make sure to complete the signature area of the Form SS-4.

Why Apply for an Employer Identification Number (EIN)

Even if the government doesn’t require an EIN, it’s still advisable to get one. With an EIN, it’s more feasible to separate one’s personal and business finances. Over time, the EIN helps simplify bookkeeping and accounting and limits liability in instances of a lawsuit.

Filing Business Taxes and Avoiding Tax Penalties

If a business owner doesn’t have an EIN by tax day and was meant to have one, it will be imperative to fill out certain paperwork to notify the IRS. The IRS may not accept the filing without doing that, and the business owner may face penalties for a late return. For specific tax deductions like home office deductions, the possibilities of an IRS audit are lower with an EIN.

Preventing Identity Theft

Getting an EIN prevents identity theft since it separates personal finances from the business. With an EIN, clients don’t need a business owner's Social Security Number (SSN), and the company’s EIN serves the function of the personal SSN. This prevents someone from stealing your SSN in order to open a fraudulent credit card.

Providing the EIN means business owners can keep their SSN more private, reducing the chances of identity theft. Scammers may also find it more difficult to get access to high-earned profits. Fraudsters also target EINs, but it is not as prevalent as SSN since EINS and ITIN are usually only used for tax purposes.

Adding Credibility as Independent Contractor

For independent contractors or self-employed business owners, losing a client makes a huge difference. For this reason, business owners need to try to take steps to show legitimacy. Most independent contractors or freelancers need to provide either an EIN or SSN when they take on a client to finish the 1099 tax form.

An EIN adds credibility and shows the individual has a serious business. Having a business tax ID often shows an individual is an independent contractor and not an employee. Without a doubt, that’s more attractive to companies who want to hire.

Many ventures minimize legal duties by hiring independent contractors. Hence, proof of legitimacy is an added advantage as an independent contractor or freelancer.

Building Trust with Vendors

Since it’s impossible to build everything as a small business owner, relying on vendors is often important. Vendors are even more crucial to growth when building a company, and an EIN may be imperative for a better relationship with vendors, suppliers, and potential partners.

Vendors and suppliers typically want to know the company’s credit before starting work together. For instance, most wholesale distributors require an EIN check before doing business with the retailer. As a business owner, the EIN proves credible business ownership and a high level of responsibility.

Speeds Up Process of Loan Application

An EIN helps speed up the process of applying for a business loan. Most lenders don’t request an EIN explicitly, but it may be necessary. The fundamental requirement for business owners is the possession of business permits or licenses that qualify the business.

Most lenders require applicants to have a business bank account with certain deposits. It ensures such individuals have a place to get loan funds and make installment payments. It’s a requirement to have an EIN to possess a business bank account.

When evaluating an individual’s loan application, some lenders check business credit. Having an EIN helps build business credit, which helps eligibility for a loan. This can help you and your business buy essential services/assets to grow like real estate, advertising and other business needs.

Establishing Business Credit

A key to establishing a business credit history is an EIN. The business credit history is similar to personal credit history, except it deals with the firm’s financial responsibility and bill payments.

The business has a commercial credit report containing a summary of the business’s credit amounts and payment history. Anytime an individual applies for credit showing the EIN, it shows up in the business credit report.

Hiring Employees With Ease

Businesses that tend to hire employees or have employees need an EIN. It’s also advisable to get an EIN even when there are no immediate hiring plans and even if you are a sole proprietorship. Business owners that plan for scaling should consider getting an EIN.

With an EIN, business owners can set up a payroll system as soon as they hire the first employee without delays. The IRS uses the EIN to track payroll taxes. It’s also imperative to register the employment taxes for the payment of workers’ compensation and withhold income tax on behalf of employees.

Opening a Business Bank Account

Opening a business bank account may be one of the most popular uses of an EIN. However, some banks also allow sole proprietors to open a business bank account without an EIN. For instance, Bank of America's checking and savings account needs proof of EIN from sole proprietors and other business types.

Along with the EIN, individuals need to provide other documents to open a business checking and savings account. Examples of such documents include the business location, legal business name, and the owner’s personal information. Some business bank account providers like Nearside do not require extensive documentation for most applicants.

Final Thoughts

All potential business owners can get an EIN for free on the IRS’ website or online by fax, mail, or phone. One of the easiest methods of getting the EIN is applying online. However, it’s imperative to ensure that the applicant is a business owner, an officer, or a principal staff.

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