Key Takeaways

  • Sole proprietors can benefit from an EIN by protecting their SSNs and establishing business credit.
  • An EIN is often required for hiring employees, opening a business bank account, or forming an LLC.
  • EINs improve business legitimacy and simplify tax filing, even for single-owner businesses.
  • Applying for an EIN is free and can be done online, by fax, or by mail through the IRS.
  • Some platforms and vendors may require an EIN to establish partnerships or access financial tools.

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.

Benefits Specific to Sole Proprietors

For sole proprietors, the benefits of having an EIN extend beyond IRS compliance. Some of the most notable advantages include:

  • Privacy Protection: Using an EIN instead of your SSN reduces the risk of identity theft when filling out tax documents or W-9 forms for clients.
  • Business Credibility: Having an EIN lends your sole proprietorship more legitimacy, especially when dealing with banks, suppliers, or potential partners.
  • Separation of Personal and Business Finances: An EIN helps distinguish your business activities from personal ones, which can be useful for bookkeeping and tax purposes.
  • Vendor and Payment Platform Requirements: Platforms like Amazon, Stripe, and PayPal may require an EIN for account setup, even for sole proprietors.
  • Eligibility for Certain Deductions or Loans: Some lenders and grant programs require an EIN to verify business identity.

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.

When an EIN Is Recommended for Sole Proprietors

Even though the IRS doesn’t mandate an EIN for sole proprietors without employees, it is strongly recommended in the following scenarios:

  • You operate as a freelancer or contractor and regularly submit W-9s.
  • You plan to open a business bank account that requires an EIN.
  • You intend to build business credit separate from your personal credit.
  • You’re applying for a business license or permit in a state that mandates an EIN.
  • You want to streamline the process of hiring employees or subcontractors in the future.

Applying early helps lay a foundation for business growth and ensures smoother transitions should your business structure evolve.

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.

How to Apply for an EIN Without a Business Entity

Sole proprietors without a formal LLC or corporation can still apply for an EIN directly through the IRS. You do not need to be incorporated to qualify. When applying:

  • Choose “Sole Proprietor” as your legal structure on the IRS application.
  • Provide your personal SSN but use your business name if applicable.
  • Clearly define your primary industry and expected activities.

The EIN is issued immediately if you apply online, and confirmation can be downloaded as a PDF. This simple step can make future tax filings, payroll setup, and vendor dealings significantly more efficient.

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.

EIN Changes for Sole Proprietors

As a sole proprietor, you typically retain the same EIN unless your business undergoes a major structural change. You must apply for a new EIN if:

  • You incorporate your business or form a partnership or LLC.
  • You inherit or purchase another existing business.
  • You are subject to bankruptcy proceedings.

Routine changes—such as a change in business name or location—do not usually require a new EIN. However, you should notify the IRS of such updates to keep your business records current.

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.

Frequently Asked Questions

  1. Is an EIN required for sole proprietors?
    No, but it is highly recommended for tax privacy, banking, and credibility reasons.
  2. Can I use an EIN instead of an SSN for freelance work?
    Yes, an EIN can be used in place of your SSN on W-9s and other tax forms to protect your identity.
  3. How do I apply for an EIN as a sole proprietor?
    You can apply online through the IRS website, or by submitting Form SS-4 via mail or fax.
  4. Do I need to pay to get an EIN?
    No, applying for an EIN is free when done directly through the IRS.
  5. Will I need a new EIN if I form an LLC later?
    Yes, forming an LLC usually requires a new EIN because it changes your business’s legal structure.

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