What is an EIN and Why Do I Need One?

Not all small business owners need an employer identification number (EIN), but it may be beneficial to get one anyway depending on your situation. Here’s what you need to know about applying for an EIN and the possible advantages it could bring.

At a glance:

An EIN is a tax ID number for businesses.
Some businesses are required to have an EIN, but all business types can apply for one.
Applying for an EIN is free and can be done online through the IRS website.

What is an EIN?

Think of an EIN as a Social Security number for your business. It’s a unique nine-digit business tax ID number that helps the IRS identify your business for tax and reporting purposes.

Do I need an EIN for my new business?

The IRS requires certain businesses like corporations, partnerships, and limited liability companies (LLCs) to have an employer identification number. But it can be beneficial to get an EIN even if you don’t legally need one. All business types can apply for an EIN, even a sole proprietorship.

Your business requires an EIN if:

• You currently have or plan to hire employees.
• You operate as a corporation or partnership.
• You withhold taxes on income paid to nonresident aliens.
• You have a solo 401(k) retirement plan or other self-employed retirement plan (sometimes called Keogh plans).
• You buy or inherit a business.
• You file any of the following tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms.

Certain types of organizations — like trusts, estates, and non-profits — also require getting an EIN.

Tax Tip: To help you determine if an EIN is necessary for your business, check out the full IRS questionnaire. If you answer yes to any of their questions, your business needs an EIN.

Does getting an EIN cost money?

The EIN application is free, and you can apply by phone, mail, fax, or online. To do so, you must fill out Form SS-4, Application for Employer Identification Number.

How do I apply for an EIN?

Online: One of the easiest ways to apply for an EIN is through the IRS website. You will need to fill out your application in one session. Once you submit your application and the system accepts it, you’ll get your EIN right away.

Mail or fax: If you’d prefer, you can print off Form SS-4, fill it out, and mail or fax it to the IRS.

Phone: If you are an international applicant, you can get your EIN over the phone by calling 267-941-1099 (not toll-free) from 6 a.m. to 11 p.m. ET, Monday through Friday.

What are the benefits of getting an EIN?

Legal separation: An EIN separates your business finances from your personal affairs, giving you more liability protection and simplifying your finances.

Business bank account: Many banks require proof of an EIN to open a business bank account — even as a sole proprietor. Having a business bank account will also help you apply for business loans or credit lines.

Avoiding identity theft: Using an EIN instead of your personal Social Security number reduces the risk of identity theft since you don’t have to constantly give out your SSN for business purposes.

Building business credit: Having an EIN can also help establish good credit for your business. Whenever you apply for credit with your EIN, that account starts showing up on your business credit report and contributes to your business credit score. Having a good business credit score can make it easier for you to obtain business financing down the road.

Can I change my EIN?

Your EIN is meant to be a permanent identifier of your business, so you can’t just change your EIN on a whim. However, if your business ownership or business structure is changing, you may need to obtain a new EIN. For more information, the IRS has a whole page detailing when each business structure may need a new EIN.

The bottom line

While not all small businesses are required to have an EIN, applying for one can offer many advantages, from simplifying your finances to helping you build business credit. Whether you’re starting a corporation, LLC, or just want to keep your personal and business finances separate, getting an EIN can be a valuable tool. The process is simple and free, and with the added benefits of protecting your personal information and enhancing your business’s financial standing, it’s worth considering for any business owner!

This article is for informational purposes only and not legal or financial advice.

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Tags: CorporationCredit ReportIdentity TheftIRSPartnershipSelf-EmployedSmall Business

Meghen Ponder: Meghen Ponder is an editorial writer for TaxAct who specializes in writing content about finance and taxes. She enjoys decoding the intricacies of the tax world and helping others answer their tax questions.