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Business Taxes 101: Understanding Employer Identification Numbers

Business Taxes 101: Understanding Employer Identification Numbers 

question-markYou’re in business, and you’ve been using your Social Security number as your taxpayer ID for the business. But, some companies use an EIN, and you wonder why. Just like a Social Security number, an Employer Identification Number, also called an EIN, is how the IRS identifies your business.

Do You Need an EIN?

Not all businesses need an EIN. If you have employees, though, you do need one. You also need one if you file tax return documents, operating as a corporation or even a partnership. If you withhold taxes or income other than just wages, you have a Keogh Plan, or you’re involved with organizations listed on the IRS’s website, then you’ll also need an EIN.

Some banks will require you have an EIN before opening a bank account for your company. Your credit card company might also require one to open a line of credit in your business’s name. Finally, if you have to apply for any permits, or file form 1099 for independent contractors, you might be required to have one.

Even beyond all these reasons, an EIN makes sense for privacy. When you use your Social Security Number, you may be unwittingly opening yourself up to identity theft. How? Even though tax returns are not public information, any information you give to a 3rd party can be sold or accessed publicly.

Think about it. Most people (and even companies) file electronically these days. When you do, you must go through a 3rd party company like H&R Block or TurboTax. Those companies are not legally obligated to keep your information private. In fact, they often share this information with other companies.

 How To Apply For One

Applying for an EIN is fortunately very easy. All you need to do is go to the IRS website and apply online. The agency makes this very easy to do. Very few businesses need “expert advice” on how to do this. If you apply online Monday through Friday, between 7AM and 10PM, you’ll get your EIN immediately. You can also fill out form SS-4 and mail it in to get your EIN.

Who Is The Responsible Party?

A responsible party is the person who is responsible for the corporation filing. This would normally be you (or the owner of the company. You’ll need to disclose your taxpayer ID number.

Is It Possible To Cancel An EIN?

Absolutely not. Once you start a company, file for an EIN, and receive it, it’s yours for life. Even if you go out of business, the IRS does not cancel your EIN. In this sense, EINs are like Social Security numbers. In fact, this is how the IRS treats them. Each legal entity gets one per lifetime.

After that corporation goes out of existence, the EIN is buried with it. This prevents tax and identity fraud later on, but it also protects you from other people using your company’s EIN by mistake, and making you liable for taxes on a company you no longer own or operate.

Jeremy is a veteran tax analyst. He enjoys blogging about the ins and outs of the tax code for the everyday person to understand.



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