What Is an Employer Identification Number (EIN)?
An Employer Identification Number (EIN) is a unique identification number that is offered to a business to easily identify the entity by Internal Revenue Service (IRS). Most commonly EIN is used by employers for the purpose of reporting taxes. The EIN is also known as a Federal Tax Identification Number. When it is used to identify a corporation for tax purposes, it is commonly referred to as a Tax Identification Number (TIN).
Below are the key takeaways:
- An Employer Identification Number is a unique number assigned to a business so that it can easily be identified by the IRS.
- Applying for one is free and applications are available on the IRS website and can easily be filled and submitted electronically.
- A business must be located in the U.S. and have a valid taxpayer identification number before it can be issued an Employer Identification Number.
Like a Social Security Number (SSN) is used to identify the individual residents of the United States, the EIN is issued to identify the business entities in the country. The EIN is a unique nine-digit number issued by the IRS and includes information about which state in which the corporation is registered.
The digits of an EIN are formatted as follows: XX-XXXXXXX. The IRS uses the EIN to identify taxpayers that are required to file various business tax returns.3
Business entities looking to operate in the U.S. must apply for an EIN by phone, online, fax, or by mail. All forms of businesses can apply for and be issued EINs, entities such as limited liability companies (LLCs), sole proprietorships, non-profit organizations, government agencies, S corporations, partnerships, estates, and trusts, etc. Furthermore, the IRS is not biased towards the size of the company as a company with only one employee is as eligible for an EIN as a multinational corporation.4
How to Get an EIN
Applying for an EIN costs nothing and an application form available on the IRS website can easily be filled and submitted electronically. Once the online information has been validated, an EIN is assigned immediately. However, a business must be located in the U.S. and must have a valid taxpayer identification number before it can be issued an Employer Identification Number.
A business needs an EIN in order to pay employees and to file business tax returns. Furthermore, financial institutions such as banks, credit unions, and brokerage houses will not open an account for a corporation without an EIN. Self-employed individuals such as subcontractors are typically required to have an EIN, which will be used by the primary contractor to report to the IRS all business income paid to the subcontractor.
Employer Identification Numbers are unique to the businesses to which they are assigned. The numbers never expire, and the same number set is never reissued to another business, even if the original employer goes out of business.
Special Considerations
Businesses that have changed their ownership structure usually must apply for a new EIN. For example, sole proprietors who plan to incorporate their business must apply for a new EIN. Depending on the nature of the particular taxpayer, the EIN may or may not be the TIN used by the IRS. For sole proprietors, the TIN is their Social Security number or an employer identification number. For corporations, partnerships, trusts, and estates, this number is an EIN.
Tax-exempt, charitable, non-profit organizations, and EINs
The issuance of an EIN to a non-profit organization is separate and distinct from the organization’s actually obtaining tax-exempt status from the IRS. Each chapter of a national non-profit organization must have its own EIN, but the central organization may file for a group tax exemption. Before donating monies to a charity, it is advisable to verify its proper registration and IRS Form 990 tax-exempt status. The entire database is searchable, and one can verify an entity’s registration, status, and assets and liabilities registered in private databases.
Before applying for an EIN, it is always preferred to check whether the affected organization has been formed legally or not. Almost all organizations that apply for EINs can have their tax-exempt status automatically revoked if they have failed to file a necessary return or notice for a period of three years consecutively. Such three-year period begins when the organization is legally formed; it is best to form the organization legally before applying for an EIN.
BENEFITS OF GETTING AN EIN
1. File Tax Returns
2. Hire Employees
3. Maintain Corporate Veil
4. Prevent Identity Theft
5. Open a Business Bank Account
6. Build Business Credit
7. Qualify for More Business Loans
You Can’t Really Cancel an EIN:
When you are starting a business, you must apply for a federal tax ID. The fastest way to do this is to apply online for an EIN, or employer identification number, but you can choose to apply by mail as well. If you apply for an EIN number, and later need to cancel, here are a few things you should know:
Whether you apply online for an EIN, or choose the longer route of applying by fax or by mail, your EIN number becomes permanently attached to your business. If you applied online for an EIN that you don’t need, you can request to close the IRS account for that EIN. However, that EIN will never disappear and will never be reassigned. You’ll also be able to use that EIN for that business at a future time.
You’ll Need to Explain Yourself: If you need to close a business account after you apply online for an EIN, you will need to send a letter to the IRS explaining your request. You’ll need to include information such as the complete legal name of your business, the address, the EIN, and the reason that you need to close the account.
Organization Type Matters: If you apply online for an EIN for a tax exempt organization and later need to close your account, you may need to send your letter and explanation to a different source. Figure out the nature of your organization before you mail your request to close your account to ensure that you are sending everything to the right place. You can also find a checklist on closing a business via irs.gov.
While you cannot really cancel an EIN, you can close your account with the IRS and make tax season a whole lot more simple.