When you’re starting a business, you’ll have a lot of questions. Among them, “Do I need an EIN?” As with so many business questions, the answer is “it depends.”
According to the IRS, an EIN is a nine-digit number used to identify tax accounts of employers and certain others who have no employees. It’s sometimes referred to as the business equivalent of a Social Security number, though the format is slightly different: XX-XXXXXXX. It’s also known as a federal tax identification number “TIN.”
There are times when you must obtain an EIN, and others where it’s not required, but is recommended.
Not all businesses will need an EIN. For example, if you are a sole proprietor with no employees, or operate an LLC with no employees that is treated as a sole proprietorship, you may not need one.
Generally the IRS says you must get a new EIN if you change your business structure. The IRS says, for example, you will need a new EIN if you operate as a sole proprietor but then:
- Incorporate your business
- Take in partners or operate as a partnership
- File for bankruptcy under Chapters 7 or 11 of the bankruptcy code
- Establish a pension, profit-sharing or retirement plan
You will also need an EIN if you are required to report employment taxes or give tax statements to employees or annuitants. There are a variety of other circumstances that require a new EIN, including if you become a subsidiary of a corporation, or if you receive a new corporate charter. It’s a good idea to talk with your accountant and review the IRS guidelines when deciding whether to apply for a new EIN.
Recommended But Not Required
There are other circumstances where you may not need a new EIN but it’s recommended. Two of them are if you:
- Open a business bank account. Some financial institutions may require you have an EIN before opening a business checking account.
- Apply for business financing. In some cases, lenders or financing companies will require you to provide a Social Security number either to check your personal credit or because you will provide a personal guarantee. But there are some types of financing where that’s not required and you can simply provide your EIN.
- Have clients for which you must submit a Form W-9, Request for Taxpayer Identification Number. If you aren’t required to have an EIN, getting and using one can allow you to avoid giving out your Social Security number to these third parties, and may even help establish you as a legitimate small business owner in the eyes of your clients or customers.
The good news is you can get an Employer Identification Number for free and even request it via the IRS website. You can also fax or mail IRS form SS-4 to the fax number or address found in IRS Publication 1635. The IRS warns that you do not need to pay someone to request an EIN for you.
Once you get your EIN you will use it in conjunction with business transactions and filings. It is not mean to substitute for your Social Security number. (There are some scammers that will try to help people rebuild bad credit by recommending they get an EIN or TIN in place of a Social Security number. Avoid them.)
Also note that if you change your business name or move to a new location, you can generally keep your current EIN.
One more important caveat: Your EIN does not affect how your business income will be taxed. You’ll still need to talk with your accounting professional or review IRS Form 8832, Entity Classification Election.
This article is not meant to provide legal or tax advice and does not cover every situation. Please consult a tax professional or attorney, or visit the IRS website for more information.