This article was updated on Sept. 5, 2018.
Small business tax compliance requirements can be a tricky minefield and not every small business owner is an expert on them. Regardless, one thing you need to know about is the employer identification number (EIN).
EIN: What, Who and How
The employer identification number (EIN) is the corporate equivalent of a Social Security number and is required for any business owner who must withhold taxes from employees to be paid to the government.
Businesses required to obtain EINs include corporations, partnerships, nonprofit associations, trusts, government agencies and certain individuals or other business entities. In some cases, sole proprietorships are required to obtain one, unless they don't have employees and don't file excise or pension tax returns.
The IRS states that business owners who answer "yes" to any of the following questions require an employer identification number:
- Do you have employees?
- Is the business either a corporation or a partnership?
- Do you file employment, excise or alcohol, tobacco and firearms tax returns?
- Are taxes on income other than wages for a nonresident alien withheld?
- Do you have an employer-funded, tax-deferred retirement plan for unincorporated businesses or self-employed persons who earn only part of their income from self-employment?
- Are you involved in any of the following types of organizations: trusts, estates, real estate mortgage investment conduits, nonprofit organizations, farmers' cooperatives or plan administrators?
Obtaining your business's EIN is simple. It's issued by the IRS and can be applied for online, by fax or by mail. The process is free of charge and is immediate if done online.
Businesses need to obtain a new EIN if they file for bankruptcy, incorporate, turn a sole proprietorship into a partnership, or start a pension, profit sharing or retirement plan. It is not necessary when changing the name or location of the business or opening new locations. These numbers cannot be canceled, but associated business accounts can be closed by the IRS.
In some cases, the use of EINs can help protect a person's privacy, especially as more personal information is being collected, stored and processed electronically. According to the National Association of Family Care Providers, people who are self-employed as caregivers have historically given their Social Security numbers to parents to enable them to claim childcare tax credits or use a dependent care plan at work. Providing an EIN is an alternate route to giving up your Social Security number.
Contractors working for multiple clients may also want to obtain such a number so they can avoid distributing their Social Security number to multiple partners. Employer identification numbers are not considered to be personal identifiers. In recent years, the IRS has allowed EINs to be used in the place of a Social Security number, even when no employees are hired.
Every small business should look closely at EINs, because many are required to obtain and use them to file taxes electronically. Without such a number, it could lead to a delay, which may result in penalties.