Federal Tax ID - Understanding Its Need
A federal tax ID, more commonly known as Employer Identification Number (EIN) is a nine-digit number assigned to business entities. This enables the Internal Revenue Service (IRS) to identify them for tax reporting purposes. Much like Social Security Numbers, they seldom expire and are never reissued to another business entity.
In this article, we will look at the tax ID number in detail and understand the need for getting one.
Who is Eligible to Obtain a Federal Tax ID Number?
For a tax ID number, the applicant must have a business entity in the US. Additionally, he must possess his own Taxpayer Identification Number, such as a Social Security Number.
Most entities operating in the US may apply and easily obtain their tax ID number. This includes sole proprietorship firms, LLCs, non-profits, and government agencies. There is no minimum requirement or limitation on the size of the business entity. Even a sole proprietor with a single employee is eligible to obtain a federal tax ID number, and so is a multinational corporation.
What is the Need for a Federal Tax ID Number?
You may require a tax ID number for many reasons including tax payment purposes. Businesses can file excise tax returns, employment tax returns, and firearms returns using this number. Here are some noteworthy reasons why you may need it.
- Banking and Finance: In most cases, banks and credit card companies require businesses to submit a valid federal tax ID number to open a bank account for any type of entity. Having this number also helps while obtaining working and financial capital.
- Employees: If you want to hire employees for your business enterprise, you will require a tax ID. This is because the IRS uses it to track your payroll tax transmittals. So, business owners who wish to establish a form of a business entity other than sole proprietorship require a tax ID number, regardless of whether or not the business will have any employees. Thus, if you want to start an LLC in the USA, the IRS will issue this number to track your business income taxes.
- Self-employed retirement plans: For self-employed retirement plans, a person will require an EIN or tax ID number to facilitate those types of tax treatment.
- Cases where sole proprietors need an EIN: Sole proprietors who are going to file for bankruptcy need a federal tax ID This is because the ones who purchase the business firm may not intend to run it as a sole proprietorship in the future.
When is it Unnecessary?
If you have a partnership or a corporation in the USA, having a tax ID number is mandatory. However, most sole proprietorships don’t actually need them.
Similarly, if you have a single-member LLC in the USA, you don’t need any tax ID number either. It is only required when the LLC needs to file employment tax returns or excise tax returns. When a tax ID number is not needed, the LLC is labeled as a “disregarded entity” because then the business expenditures are recounted on the sole owner’s tax returns and no separate tax return is needed.
What Are Its Benefits?
Even though many sole proprietors do not require a tax ID number, having one is often beneficial. Sole proprietors who act as independent contractors can safeguard their identities while dealing with their clients. They don’t need to provide their Social Security Number and thus, prevent the chances of theft.
Besides, having a federal tax ID number can make you appear more professional to your clients. This can help to expand your customer base and solidify client relationships.
The process to obtain a federal tax ID number is pretty straightforward. The companies only need to submit an SS-4 Application form to the IRS to get the number. Now, the IRS encourages business owners to apply for the federal tax ID number online.