Applying for an Employer Identification Number (EIN) is easy and free. But do you really need one? The short answer is — it depends.
An Employer Identification Number (EIN) is simply a number that the government uses to identify your individual business. It’s Like a Social Security number for your business (in fact it’s exactly nine digits long just like your SSN).
One query that comes up a lot is: is an EIN the same as a tax ID? It is indeed, just as your SSN is. The difference is that an SSN is for an individual person and will tie to income they generate as an employee or sole proprietor, whereas an EIN ties to a business entity and references all the income or debt it generates.
So then the big question becomes: do you need to apply for an EIN number for your new business? Well, there are a few determining factors that will necessitate it, although even if you technically don’t need to apply for an EIN, it is still not a bad idea to have one.
What the IRS has to say
The IRS has a nifty little questionnaire on their website that lets you know if you do or don’t need an EIN. Answering yes to any of the following questions means you legally do:
- Do you have any employees besides just yourself?
- Are you operating your business as a corporation or a partnership?
- Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers’ cooperatives
- Plan administrators
If any of the above apply, it’s a quick and easy application process that takes about ten minutes if you have all of your business info handy, and you receive the number the same day. There are some rare cases where you need to apply for a new EIN number, even if you have an existing one. See the IRS’s requirements for those scenarios here.
I don’t technically need one…should I get one anyway?
Even if you don’t technically need to apply for an EIN number, it’s a really good idea to have one. It is often required to open business banking accounts or to get a credit card with your business’s name on it. Certain business permits can require an EIN number to apply. To issue 1099’s to independent contractors that have done more than $600 worth of work for you per year you’ll need an EIN number. It lends credibility to you as a business owner and gives an air of professionalism, which is always a good thing, and helps your clients feel secure that they’ve chosen someone who takes their business seriously.
As a sole proprietorship, you can absolutely use your personal SSN in place of an EIN as the identifying number of the business, although that has its own weaknesses. You may find yourself having to divulge your SSN to a variety of clients or vendors you’re working with which can leave you open to identity theft.
It can also leave your personal assets vulnerable to seizure should issues arise. It’s a very similar argument to whether or not you should open a separate business banking account for your business finances. It’s just good business hygiene to keep your personal and professional finances as separate as possible.
While operating a business without applying for an EIN number is legal as a sole proprietor, we strongly recommend that you get one for the security it offers, the benefits it unlocks, and for the simple but hugely important fact that it draws a firm line between business and personal. It is a theme throughout our collective, and is one of the most important boundaries you can set in business, as in life.
Matthew Ogden is a Minneapolis-based copywriter and content writer and editor. He’s written for national retailers and lobster roll companies alike. When not writing he can be found nose deep in a book, writing and performing music, or nerding out about guitar tone.