EIN: Three Letters You Need to Know

If you are operating any kind of business with employees, you will need to apply for a federal Employer Identification Number (EIN). If you are not planning on hiring direct employees within the next 12 months, you may still be required to apply for an EIN depending on the type of entity you form. Even if you are not required to obtain an EIN at all, it can still be helpful in a number of ways to ensure that your business operates smoothly. Business Formation

Entities that Require an EIN: Most business entities are required to apply for an EIN in all circumstances, and all business entities must have an EIN if they have any direct employees. Here is a quick rundown of the most common entities and which must apply for an EIN:

  • Corporations: Every C and S Corporation must apply for an EIN.
  • Partnerships: All general partnerships must also apply for an EIN.
  • LLCs: Limited Liability Corporations (LLCs) with more than one member must secure an EIN in all circumstances. Single member LLCs must have one if they have any direct employees. If you are a single member LLC with no employees, you are allowed to use your personal Social Security number.
  • Sole Proprietorships: Sole proprietorships with employees must have an EIN. If you have no employees, your personal Social Security number will suffice.

Multiple Uses for an EIN: An Employer Identification Number is used for more than just withholding taxes and filing reports for your employees. There are several other uses for an EIN, including:

  • Business Bank Accounts: If you own and operate your own business, it is good practice to have a separate account from which to keep track of all business income and expenses. Many banks will require an EIN to open up such an account.
  • Keogh Plans: A Keogh plan is essentially a self-employed version of an IRA or 401K plan. The main difference is that Keogh Plans have significantly higher contribution limits. If you plan on having one of these plans for your business, you will need an EIN to set it up.
  • Business Licenses: If you are in any type of business that requires federal, state, or local licensing, you are likely to be asked for an EIN in order to obtain the license(s) you need to operate legally.

Grey Areas: There are some business situations when it is less than clear whether or not an EIN is required. One of the most common is when you hire independent contractors to perform work for your business instead of direct employees. As with many areas of the 80,000 plus page Internal Revenue Code, there is no straight answer to this question. As always, consult with a professional tax accountant to determine if your particular business requires an EIN and/or if obtaining one would be a good move for your business.

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