1. Benefits
2. Getting an EIN as a Sole Proprietor
3. Getting a Business EIN
4. Changing an EIN
5. Paying Taxes on Employees

What are the benefits of EIN? An EIN (Employer Identification Number) is a tax ID number that can be used as an alternative to a Social Security Number.

You use your Social Security Number (SSN) for a lot of personal things, from filing your taxes to applying for credit. Fortunately, there's another tax ID number you can use to safeguard your SSN: an Employer Identification Number, or EIN. EINs are much less sensitive than SSNs since they are only used as federal identifiers.

EINs are provided to employers and sole proprietors by the IRS. As a sole proprietor, you are not required to have an EIN, since you can use your SSN to set up your business bank account and to complete paperwork for filing business taxes and for clients.

Some states actually require business owners to acquire an EIN, a requirement that may be advantageous to you.

If you do apply for a sole proprietorship Employer Identification Number, your EIN will be tied directly to your personal SSN. This is important to note because when clients report payments to you under your EIN, the IRS connects the client payments to your SSN.

Similarly, when you apply for credit with your EIN, the creditor is able to trace the EIN back to the SSN that was provided when the EIN was issued.

Even if an Employer Identification Number of a registered person leading a business is used to apply for the business' EIN, the EIN will be linked to that person's Social Security Number. If the business does not have an established credit history, that SSN will be used instead.

In short, you need an EIN for:

  • Everything related to taxes, such as filing annual returns.
  • Changing your organization type.
  • Establishing corporate business credit.
  • Establishing trust plans, retirement, or pensions.
  • Purchasing another business.

Benefits

The IRS has a checklist to help determine whether you need an EIN.

The IRS requires employers, even if they're sole proprietors with a single employee on the payroll, to have an EIN. This is because your business will need an EIN for you to complete tax Form W-2, in addition to all employee's SSNs.

You do not need an EIN to hire a freelancer since you do not take out taxes on payments to independent contractors. However, you may still want to sign up for an EIN even if you are a sole proprietor.

An EIN helps to protect your SSN from clients. Each new client requires you to complete a Form W-4 so they can report their payments to the IRS. You can provide your EIN on this form instead of your SSN.

Getting an EIN as a Sole Proprietor

Many sole proprietors use a SSN instead of an EIN on tax forms since they do not file a business tax return.

But, there are a few reasons why a sole proprietor may be required to have an EIN:

  • Filing for bankruptcy
  • Inheriting or buying an existing business
  • Hiring employees
  • Forming an LLC or partnership

Applying for an EIN online as a sole proprietor is easy: go to the IRS website, click on 'Employer ID Number,' then click on 'Apply for an EIN Online.'

You may also apply by mail or fax, although this takes longer. The IRS recommends mailing your EIN request at least four to five weeks before you need it. You should also allow four business days after faxing a request for it to be processed. Call the IRS customer service line at 1-800-829-4933 with business-related tax questions.

Getting a Business EIN

Applying for an EIN as a small startup or one-person operation is as just straightforward. You can apply by mail, fax, or online using your SSN.

Changing an EIN

Businesses are required to get a new EIN if they:

  • Create a new corporation following a merger.
  • Receive a new charter.
  • Change to a partnership or sole proprietorship.
  • Become a subsidiary of a corporation.

Paying Taxes on Employees

When you acquire an EIN you will be automatically enrolled in the IRS' Electronic Federal Payment System. This allows you to deposit taxes that you withhold from employee paychecks by phone or online. You will be able to log in and make electronic deposits only once you receive confirmation of enrollment by phone and a PIN.

Professionals who are self-employed should consider setting up a retirement, or Keogh, plan. An EIN is required to establish this retirement plan type for those who are self-employed and for unincorporated businesses.

If you need help with an EIN, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.