This article has been written by Pranav Patade.
It has been published by Rachit Garg.
No matter how big or small, every business must eventually pay taxes to the government. That’s how a country gets funds for its various public functions. If you are a business operating in the United States of America, you must have been dealing with the Internal Revenue Service (IRS) for your taxes, so you may have some idea about the topic. Also, if you are planning to start a new business in the USA, this is an important topic for you to know about.
For some businesses, the Federal Tax ID [or Employers Identity Number (EIN)] may not seem important or necessary, but the benefits of having one outweigh the minimal amount of time it takes to get one. Also, it is free to acquire.
What is a Federal Tax ID?
IRS uses a Federal Tax ID also called EIN (Employers Identity Number) to identify your business uniquely among the other millions of small businesses in the USA. It is required on your financial documents like business tax accounts, tax-related documents, and business tax returns. It is also needed by many banks, financial institutions, credit card companies, and vendors.
The IRS provides EIN free of charge to any business owner. The application process takes less than 10 minutes, and the number is assigned immediately. The IRS issues a printable copy of EIN information that you can use while applying for business loans, business bank accounts etc.
EIN or Federal Tax ID is also known by the following names:
- Business Taxpayer identifying number
- Tax ID number
- Federal Business Tax ID
- Business Tax ID
- Business Tax ID number
- Business Taxpayer ID number
Why is a Federal Tax ID number needed
Almost all forms of business organisations need an EIN. May it be a sole proprietorship, partnership, corporation, LLC, nonprofit, estate or trust.
Corporations: If your business is a corporation, it will need an EIN. Even if it is taxed as a “C Corporation” or an “S Corporation”, it will need an EIN.
LLCs: For LLCs with two or more owners, EIN is mandatory. If an LLC has only one owner, the IRS treats it as a sole proprietorship. All the income, loss and deductions are reported on the individual owner’s federal income tax return.
Sole proprietorship: Sole proprietorship with employees is required to have an EIN. But if your sole proprietorship does not have any employees, the IRS allows using your individual tax ID (e.g., SSN) as your EIN. But you may want to have an EIN for other reasons. Like a customer may want you to share your EIN instead of an SSN (Social Security Number). A bank may insist on having an EIN for opening a business checking account. Having an EIN gives credibility to your business which you will not get by using an SSN. It also helps protect the privacy of your SSN.
The IRS requires you to have an EIN, even though you are a sole proprietor, if:
1. You have any employees;
2. You have to file excise tax returns (e.g., alcohol, tobacco, firearms);
3. You have a Keogh pension plan.
Apart from this, there are numerous benefits of having a Federal Tax ID which are discussed below.
Benefits of getting an EIN or Federal Tax ID
The following are the benefits of getting an EIN or Federal Tax ID:
1. Avoid tax penalties while filing business tax
In case you are required to have an EIN but have not got one yet, you must fill out a specific paper to notify the IRS. Failing to do so, IRS may not accept your filing, or you may even have to pay penalties for filing late returns.
There is a chance of an IRS audit if you have shown deductions under certain categories. By having an EIN this chance of IRS audit decreases.
2. Prevent identity theft
EIN uniquely identifies your business among all other businesses in the USA. In a way, it separates your personal finances from your business finances. This helps you to keep your SSN secret as you are no longer required to share it with your clients or vendors that do business with you. Instead, you can provide your EIN.
By keeping your SSN private, you are lowering the chances of identity thieves stealing it and getting their hands on your hard-earned money
3. EIN adds credibility to your business
In this competitive world, you need to have an edge to win over your clients. Establishing the credibility of your business is very important to secure new clients. An EIN gives you that credibility. If you are a freelancer or an independent contractor, having an EIN signifies that you have a serious business where you are dedicated full-time. It also signifies that you are a separate business entity rather than an employee of a small business. Having an identity as an independent contractor also opens new doors to business opportunities where your clients want to minimise legal responsibilities.
4. Speed up business loan applications
Many lenders will not ask you for an EIN. However, they need you to have a business bank account with a certain number of deposits to have a loan. This ensures that you have a valid place to receive loan funds and make periodic loan payments. To get a business bank account, the banks will often ask for an EIN.
Some lenders may want to check your business credit while evaluating your loan application. Having an EIN helps you build credibility and secure more funds in the form of a loan.
5. Helps with the opening of a business bank account
Many banks in the USA have stricter policies when it comes to opening a business bank account. Along with EIN, you must provide additional documents like the business’s formation date, location, legal business name and personal information about the owner. Once you open a business bank account, make sure it is only used for business purposes.
6. Building trust with vendors and suppliers
Having an EIN presents you as a serious business and makes it easier for your vendors and suppliers to trust you. Other businesses also prefer to do business with an entity having EIN.
These third parties might want to check your business credit before signing up to work with you. Wholesale distributors often require an EIN check before they will do business with a retailer. Having an EIN shows that you have a credible business and are a responsible person who will pay the vendor on time.
7. Establish business credit
An EIN helps you establish a business credit history. Business credit history is similar to personal credit history. It represents your company’s performance in terms of bill payment and response to financial obligations. Your business has a commercial credit report similar to your consumer credit report. It contains your business’s credit accounts and their payment history. Business credit that is acquired through lenders and payments to vendors and suppliers show up in this report.
So anytime you apply for credit, your history is checked based on EIN. If your payments and performance are good, there is a chance of getting higher credit every time with a boosted credit score
8. Easy hiring of employees
A business is not required to have an EIN if it has no employees. But there is no harm in having one even if there is no immediate plan to hire employees. As mentioned above, EIN gives credibility of being a serious business. It not only works for winning new clients but also to attract people’s talent from the market. Eventually, you will have to hire extra hands to help you with your business as it grows. Also, an EIN helps you set up your payroll system as soon as you hire your first employee without delaying the hiring process.
9. Apply for licences
For your business, you may need licences to operate. To apply for one, you will need an EIN. This helps state and local authorities get information about your organisation and help verify that you qualify for the criteria to run a business in accordance with regulations.
10. Protection of assets from business losses
While doing business, there are chances of loss and the possibility of filing for bankruptcy. You may not expect this situation in your business, but if you do come across it, you will need an EIN to ensure that your personal assets are protected. An EIN separates your personal finances from your company’s finances, thus protecting your personal assets from business losses.
11. Get more options as an overseas entrepreneur
You will not have an SSN if you are a foreign national without US citizenship. Getting US citizenship is difficult and time-consuming. But this should not stop you from doing business in the USA. You can contact IRS and apply for an EIN. With EIN generated, you are now free to apply for a business credit card or open a new business bank account despite not having a Social Security Number. This gives you a competitive advantage over your peers and get you started with your business on US soil even before getting US citizenship. However, you will also have to satisfy other criteria to qualify as a US entity.
How to get your Federal Tax ID or EIN
The best thing about getting your Federal Tax ID or EIN is that it is free to apply. In other words, you need not pay any fees to the US government to get your EIN. You can apply for your EIN by mail, online, fax or phone in case you are an international applicant. It is pertinent to note here that one can apply for only one EIN per day even if one owns multiple businesses.
The following things need to be disclosed to the IRS by any of the above modes, viz:
- Legal name
- EIN confirmation
Since the online mode is the usual preferred mode of application in this digital age, it is imperative to remember that you cannot save your midway EIN application. Your EIN application online session will expire after fifteen minutes of inactivity. So, it is crucial to finish your EIN application in one go. Also, it is a logical criterion to have your principal business on US soil if you apply online. The relevant link to apply online is here.
So finally, concluding the topic we have seen, what is a Federal Tax ID and its different aliases and how you can get one easily. Whether you are a corporation, LLC, or a sole proprietorship business, you need Federal Tax ID or an EIN. It has many benefits like avoiding tax penalties, preventing identity theft, adding credibility to your business, helping with business loans, etc. if you are planning to start a business in the USA or already have one you should consider opting for a Federal Tax ID given its benefits.
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