Getting an Employment Identification Number is the first steps when opening your business. It is simple and easy to apply online. Below we explain what is an EIN? why do you need one? and how to apply for it.
What is an EIN number?
EIN number are located on the tax return forms you file every year; it is a unique nine-digit number that identifies your business to the IRS. When you file for your end of year tax return, this is how you will identify your business.You can think of an EIN number as a social security number for your business. Don’t worry about keeping it secure though, because unlike a social security number an EIN is not considered sensitive information.
Why do I need to get an EIN number?
Although you’re not legally required to have an EIN, we recommend getting one since EINs are essential to opening up business bank accounts, business loans, building trust with vendors, establishing business credit and so much more!
EINs are used to hire employees and process payroll, although businesses without employees often find that they still need one. Every business that has employees are required to have an EIN number also known as an employer ID. Having an EIN is important as a business owner because it’ll allow your employees to file for their end of the year taxes.
Does your business operate as a corporation? (C-corporation, S-corporation or Partnership) registering your business tax ID incorrectly can avoid higher tax rates depending on the business type. Every business that files for corporation is first classified as a C-Corp. No worries, C-Corp is just another term of saying corporation.
Corporations are independent legal entities and are treated for tax purposes as their profits are taxed separately from its owners (double taxation) where as S-corp is the lite version of C-corp in other words small business corporation and their profits are passed on to the shareholders and taxed based on personal returns.
A partnership is a business that is jointly owned and run by multiple people, if you start a business and share the responsibilities with one or more individuals by default you’d have a partnership unless of course identified as a different structure such as LLC (Limited Liability Company) or Corporation.
LLC is a combination of partnership, sole-proprietorship and corporation. LLC means that its owners are typically not responsible for LLC’s debts and lawsuits and if ever to file for bankruptcy the members do not have to use personal money to pay the companies debt.
What is the importance of getting an EIN number to declare sales tax?
If your business sells a product or provides service that is taxable, and if you are in a sales tax state, you will need to visit the website of that state’s taxing authority and register for your sales tax permit. Sales tax is not revenue that the seller gets to keep, they are simply collecting the tax as part of their agreement to do business in that city or state. Every month or quarter the seller will be required to prepare forms and pay in the money they collected for taxes to the state or local government. To declare sales tax you will first need to get your federal employer ID number (EIN).
Where do I get my EIN online?
Before you apply, ensure you have a social security number or Individual Taxpayer Identification Number and know what type of business you are applying on behalf of. Probably the simplest way (and definitely the fastest) is to apply online.
Applying for an EIN is straightforward, but there are some nuances depending on where your business is based. To reduce any stress associated with the application process, let us do the hard work!
Apply for an EIN per business type
Sole Propiertor / Individual
A sole proprietor or individual is a person doing business as an organization. The person is not separate from the company and the company is not incorporated or registered with the state as an LLC or corporation. Ideal for small and micro-businesses.
Limited Liability Company (LLC)
LLC or Limited Liability Company is a flexible business structure affording protection and various tax-filing options. LLCs can be owned by one or more people and can be filed as a single-member LLC or a multi-member LLC.
Partnership / Joint Venture
Partnerships and Joint Ventures are mandatory for anyone starting an organization with partner(s).
Partnership: You create a shared business, which remains the property of all respective founders for the duration of the business unless assets or rights are bought/sold/traded to another member.
Joint Venture: A partner temporarily owns part of the company, typically for the purpose of launching a new organization, providing resources that otherwise wouldn’t be available, or achieving another clearly stated limited-time purpose.
Corporations (C-Corporations, S-Corporations, Personal Service Corporations)
Corporations are legal entities established by charter with certain legal rights, powers, privileges, and liabilities.
C-Corporation: is a company owned by shareholders. In case of financial problems or litigation, the risk falls on the corporation rather than the owners.
S-Corporation: An S-Corporation is not a business type but rather a tax-filing option. Any corporate income, losses, deductions, or credits are not taxed as corporate income but are instead passed through to shareholders, where they are reported as personal income.
Personal Service Corporation: Must have already filed as a C-Corp or S-Corp and have met conditions over the previous tax year. Personal services include accounting, actuarial science, architecture, consulting, engineering, health and veterinary services, law, and the performing arts.
Investment Trusts and Conduits (REIT, RIC)
Estate: An estate is a legal entity designed to protect a person’s assets such as real-estate, personal property, and funds after their death. Estates pay debts and distribute assets to the beneficiaries of the estate.
Trusts: Trusts can be used similarly to estates in that they can protect the assets of an individual after their death and hold them in order to perform an act or a series of acts.
Tax Exempt (Churches, Charities, Associations)
Churches, charities, and various associations are tax exempt.
Church Organization: Religious structures including temples, mosques, churches, houses of worship, and other organizations for religious-only purposes can file for tax-free status.
Non-Profit Organization: These organizations must operate on a not-for-profit basis with a defined goal and mission statement. Organizations including corporations, trusts, LLC, and unincorporated associations can choose to register for tax-exempt status. Sole-proprietorship and partnerships or joint ventures cannot.
The Difference Between EIN and Tax ID
There are a few different numbers used to identify a business depending on the context. As far as bookeeping and taxes go, these numbers are often referred to generically as a tax ID, federal tax ID number, or business tax ID number. If you’re a business owner and you hear any of these terms, they are referring your EIN.