What is an EIN? How to Get an EIN (for FREE)?
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If you are just starting out in business, you may have heard the term EIN and been confused about what it means. So, let’s clear that up. An EIN, or Employer Identification Number, is an identification number the IRS uses to identify your business for specific tax purposes.
Also, there is a reason it comes up so much, and this is because most businesses will need one. So, let’s talk more about what it is when it’s needed, how it works, and how you can file for one for free.
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- What Is an EIN?
- When Do I Need an EIN?
- 9 Reasons for a Business to Get an EIN Regardless of Requirements
- Reason #1: Reduced Chance of Audits & Tax Penalties
- Reason #2: Raise Your Credibility
- Reason #3: Increase Vendor Trust
- Reason #4: Protect Your Identity
- Reason #5: Business Bank Account
- Reason #6: Applications for Business Loans
- Reason #7: Establish Business Credit
- Reason #8: Hire Employees Quicker
- Reason #9: Improved Options for Foreign Entrepreneurs
- How To Get an EIN For Free?
- Professional Services to Help You With LLC Formation and EIN
What Is an EIN?
EIN stands for Employer Identification Number, and it is often also known as a Federal Tax Identification Number (FTIN) or Federal Employer Identification Number (FEIN).
The EIN is a nine-digit number that helps the IRS identify your business for tax purposes, such as for employment taxes. This makes it necessary for hiring employees; however, it is also often used for purposes, such as opening a business bank account. It is quite likely your business will need to file for an EIN at some point in its existence
When Do I Need an EIN?
The IRS has clearly established rules for when an EIN is absolutely necessary for a business. If any of these conditions apply to your business, then you will need to apply for an EIN.
You will need to apply if:
Let’s take a look at when an EIN is required for specific business structures.
If your business is structured as a sole proprietorship with no employees and does not need to file any returns for pension plans or excise taxes, then you will not be required to file for an EIN.
However, if a sole proprietorship has employees or any of these other conditions apply, it will need to file for an EIN. Additionally, it is still recommended to file for an EIN in order to open a business bank account and allow your business to build credit. It can also serve as an important identification tool to reduce the risk of identity theft.
Single-member LLCs have very similar requirements to sole proprietorships as far as EIN requirements are concerned. Just like sole proprietorships and all other business structures, a single-member LLC is required to file for an EIN number if they want to hire employees or owe excise taxes.
S corporations generally must file for an EIN. Similarly, C corporations are viewed as separate entity from their owners and are required to file for an EIN in order to report taxes.
For all entities structured as a nonprofit, an EIN is required for tax reporting purposes.
Estates and Trusts
In general, estates and trusts must acquire a separate EIN for tax reporting purposes.
9 Reasons for a Business to Get an EIN Regardless of Requirements
Even if your business is not required to acquire an Employer Identification Number, it’s often a really good idea to do it anyway. For many businesses, it can help to separate personal finances from business finances, which is particularly important for LLC owners.
This can also make it easier to keep track of your business’s finances, reduce personal liability, and make it easier to perform many basic business activities. By passing on filing for an EIN now, you may simply be making it harder and costlier for yourself in the future.
Reason #1: Reduced Chance of Audits & Tax Penalties
You have just seen how many businesses are required to file for an EIN in order to file their taxes. Unfortunately, many business owners may become confused if one or more of these requirements apply to them. Also, things change, and a requirement that didn’t apply when your business started may apply now. These mistakes can be avoided with careful research and continued caution, but no matter how hard you may try, sometimes mistakes happen
If you do realize you need an EIN, it can take up to five weeks for the IRS to finish assigning you an EIN number, depending on how you choose to file. If you are required to have an EIN, and you don’t have one by tax day, you are going to be stuck filling out a lot more paperwork to try and explain it to the IRS. Otherwise, they may reject your tax filing and charge you penalties for a late return.
Additionally, having an EIN can reduce the chances of an audit, which is particularly important for claiming many kinds of tax deductions, such as for home offices which greatly increase the odds of an audit. An EIN can make your business appear more legitimate to the IRS and make a better case for your home office deduction before they decide to audit you.
Reason #2: Raise Your Credibility
For many small businesses, including freelance and contract businesses, you are going to need to supply your clients with either your Social Security Number (SSN) or your Employer Identification Number so they can issue you a Form 1099. This may seem like a small change, but it can make all the difference between a client taking your business seriously or choosing another contractor.
By supplying an EIN rather than an SSN, you are clearly showing that what you are doing is a business instead of a hobby or “side-gig,” and that establishes a clear air of legitimacy. It can help show other businesses that this is a professional business, and it can even help you feel better knowing that your business is officially recognized as such.
Plus, for many businesses, hiring an independent contractor is a way of lowering legal responsibility and avoiding employee costs. This can make your business much more desirable to many potential customers.
Reason #3: Increase Vendor Trust
Often when you’re just starting out as a business owner, you need a lot of help from vendors and suppliers in order to run your business. This makes it important to achieve their trust, and this is much easier to do with an EIN.
First off, many vendors will want to look at your business credit before working with you. Also, wholesalers will very often require an EIN check before selling to retailers. Having an EIN will show other parties that you are a credible business and likely to pay your debts on time to a vendor.
Reason #4: Protect Your Identity
An EIN is an extremely effective way of preventing certain kinds of identity theft because of how it separates your personal and business finances. Without an EIN, you must supply your SSN to clients you do business with for 1099 tax forms.
But, with an EIN number, you can supply clients with this instead of your SSN number. You can keep your SSN private, reducing the likelihood of thieves getting their hands on your private information and money.
Though thieves steal and fraudulently use EINs, the problem is far smaller than with SSNs, and the harm is far more limited. The chances for identity theft are far smaller with an EIN.
Reason #5: Business Bank Account
This is an important one, particularly for those forming an LLC. Most banks require an EIN in order to open a business bank account. Some offer an exception for sole proprietorships; however, others, including Bank of America, require an EIN for all types of businesses, including sole proprietorships.
In addition to your EIN, most banking institutions will require a few more documents to open your business bank account. This will include your business’s date of formation, the name of your business, your street address, and information about its owner or authorized representative. Once the business bank account is opened, it is important to remember that it should only be used for your business’s finances, not personal ones.
Reason #6: Applications for Business Loans
An EIN is not always completely necessary for business loan applications, assuming your business has all permits and licenses required to legally run your business. However, it can significantly speed the process up.
The first reason is that many bank lenders require a business bank account with a minimum quantity of deposits. This is both to ensure your business has a place for the loan funds to be deposited. It also guarantees your business has a location from which to make regular loan payments.
A final reason for this is that many lenders wish to check your business credit before offering you a loan. An EIN helps your business to build credit and potentially qualify for a business loan.
Reason #7: Establish Business Credit
Having an EIN is critical to building a credit history for your business. This business credit history is very similar to the personal credit history you are probably familiar with. However, instead of measuring your personal financial history, this will measure based on your business’ history of paying bills and general financial responsibility.
Similar to how you have a consumer credit report, your business has a commercial credit report. This contains a summary of all your business’s credit reports as well as its payment history. This includes your record of loans, vendor and supplier payments, and business credit card history if any.
If you ever apply for credit with your EIN, then that account will appear on a commercial credit report for your business. The more responsible you are with that account, i.e., timely payments, the better your credit history will appear. This can help your business to qualify for loans and better rates as well. This can even help to acquire better terms from suppliers.
Reason #8: Hire Employees Quicker
If and when you hire employees, you will be required to acquire an EIN, but even if you don’t, you may want to be prepared for it if you wish to hire employees in the future. This can be difficult to predict; however, if you think your business may grow at some point, it can be a good idea to be prepared and simply file for an EIN now. By having an EIN now, you can have it ready and get your payroll system going as soon as your first employee is hired.
Reason #9: Improved Options for Foreign Entrepreneurs
For non-US citizens, the lack of a Social Security number can greatly hamper many basic business activities, and this means having an EIN number can be particularly invaluable in starting a business. With an EIN, foreign nationals will be capable of filing for business credit cards and bank accounts without an SSN. This is particularly important if your business needs to get moving in a hurry.
Foreign nationals may apply for an EIN number through applying with the IRS; however, unless the individual company’s principal officer has already acquired a Taxpayer Identification Number (TIN), they will have to file by fax or mail, not online. You will need to fill out Form SS-4; when the form asks for your TIN, simply fill in “foreign/none.”
How To Get an EIN For Free?
Receiving your free EIN is as easy as applying for it directly through the IRS. This can be done by filling out Form SS-4 and mailing or faxing it in, applying by phone (only for international applicants), or applying online.
1. Applying for Your EIN Online
It isn’t difficult to apply for your EIN online, but you will need to answer some questions. Also, keep in mind that only businesses based in the US or a US territory are eligible to apply online. You’ll need to state what type of business you are starting. This could be a sole proprietorship, a partnership, an LLC, or a corporation. The IRS will also want to know the name of the business and the formation date.
You’ll also need to put down how many owners your business has as well as what state your business is located in. Additionally, the form will ask why you are requesting an EIN and the principal officer or responsible party of the business. You’ll need to put the social security number of the responsible party as well. It could take weeks if you apply this way.
2. Applying by Mail
To apply by mail, you will need to complete Form SS-4, sign and date it, and send it to the IRS at:
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
The IRS warns that it is best to complete this at least 4-5 weeks before it will be needed. It will take approximately 4 weeks to receive your EIN.
3. Applying by Fax
You can file for your EIN by fax by completing Form SS-4 and faxing it to the IRS using the number 855-641-6935. This service is available 24/7; however, expect to receive your EIN within 4 days. Also, remember to leave your return fax number, so the IRS will know where to send your EIN number.
4. Applying by Phone
This option is only available for international applicants without a legal residence, principal business, or office address in the US or any of its possessions. If this applies to your business, then call 267-941-1099 from 6:00 to 11:00 p.m. Eastern time from Monday through Friday.
International EIN Applicants
Don’t worry; if you aren’t a US citizen and you haven’t got a social security number, you can still get an EIN. You can apply by mail, phone, or fax. The application process varies depending on which way you apply.
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Many things can seem confusing and intimidating when you are just starting out in business, but an EIN doesn’t need to be. Now, with the information you have learned, you can file with the IRS for an EIN number at no cost, in minutes.