If you are starting a business, administering an estate, or are the trustee of an irrevocable trust, chances are that you will need to obtain a federal Tax Identification Number for your company. Whether or not you are a business owner with employees, the identification number is referred to as an Employer Identification Number, or EIN for short.
An EIN is a nine-digit number used to identify businesses and certain other entities, described more fully below. While Social Security Numbers also have nine digits, EINs are easy to spot because they are formatted differently. Instead of using an xxx-xx-xxxx pattern, EINs use an xx-xxxxxxx pattern. Each entity that needs an EIN should have only one EIN.
There are a variety of uses for EINs. Common uses include the following:
You may need to obtain an EIN for a number of reasons, including business, estate, or trust banking, and hiring employees. Businesses also need EINs when they are required to file employment tax returns; excise tax returns; or alcohol, tobacco, and firearms returns. The following are reasons why you may need an EIN:
While EINs are necessary for corporations and partnerships, most sole proprietorships actually do not need them.
Similarly, single-member LLCs do not need EINs either, unless the LLC is required to file excise tax returns or employment tax returns. When an EIN is not required, the LLC is said to be a “disregarded entity” because the business’ income and expenses are reported on the sole owner’s tax returns, so a separate tax return is not necessary.
Although “trusts” is one of the common types of entities that obtain EINs, you will probably not need an EIN if you have created a revocable living trust. That is because these types of trusts typically use the grantor’s Social Security Number during his or her lifetime. When the grantor dies, his or her revocable living trust will become irrevocable and will require an EIN at that time.
Even though most sole proprietors will not need to obtain an EIN, it can be beneficial to obtain one in some cases.
First, sole proprietors who act as independent contractors can help protect their identities by obtaining and using an EIN with their clients, rather than providing their own Social Security Numbers.
Having an EIN may also make an independent contractor or sole proprietor appear more professional to potential clients. Some sole proprietors find this helps them land and solidify client relationships more easily.
When you apply for an EIN, you will need to have certain information available at the time of the application. That information includes:
After you have obtained an EIN, you have an ongoing obligation to notify the IRS when certain events occur. For example, if your business’ address or name changes after your EIN has been issued, you will need to notify the IRS in writing, signed by an authorized person for your legal entity.
Similarly, a corporation wishing to be taxed as an S corporation must file Form 2553, and an LLC that elects on the EIN application to be taxed as an S corporation must file an additional form—Form 8832—with the IRS.
Finally, if your business closes or an estate or trust has been fully administered and distributed, you can notify the IRS so they can close the tax account associated with that EIN.
A final word of caution: Business owners and other responsible parties should ensure that their EINs are used only for business purposes, and not in place of the owner’s own Social Security Number.
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