Starting a small business requires some paperwork, especially if you plan to operate as a corporation or partnership, want to hire employees or intend to sell highly regulated products like alcohol or firearms. In addition to completing your business registration and obtaining the necessary business licenses and permits, you'll also need to prepare for the various types of businesses tax structures, including employment taxes, income tax and sales tax. Both a federal tax ID number and a state tax ID number are necessary for most business entities to operate legally.
TL;DR (Too Long; Didn't Read)
Corporations and partnerships that hire employees need to have both federal and state tax ID numbers. Sole proprietors only need to apply for federal and state tax IDs if certain qualifications are met, such as filing for bankruptcy or paying into a Keogh pension fund.
Difference Between State and Federal Taxes
The IRS issues a federal employer identification number, or EIN, to businesses that pay federal taxes and/or hire employees. This nine-digit number allows the IRS to identify each unique business, even if the business's name or location changes. However, this tax ID number is only sufficient on a federal level. Your state government has its own system for identifying businesses and organizing tax documents, so you'll need to get a state tax ID number in addition to a federal tax ID number.
In addition, the type of taxes collected by the federal government and state government can differ. For example, corporations in South Dakota and Wyoming pay neither a corporate income tax nor a gross receipts tax at the state level. Nevada, Ohio, Texas and Washington also do not have a state corporate income tax but instead collect taxes on gross receipts. Understanding your local tax law is an important step in starting a new business, and it all begins with a state tax ID registration.
Does Every Business Need a Tax ID?
If you don't need a federal EIN, chances are you don't need a state EIN either. For example, if you operate your business as a sole proprietorship, you can use your Social Security number on your tax forms instead of a state tax ID. However, if you decide to hire employees or change your sole proprietor status to a corporation or partnership, you need to obtain both a federal and state tax ID number. Also, keep in mind that tax-exempt organizations do need to file tax returns and therefore still need federal and state tax ID numbers.
Other situations in which a tax ID is required include withholding taxes on income other than wages for a nonresident alien, using a Keogh pension plan and filing taxes for alcohol, tobacco or firearm sales. Sole proprietors who file for bankruptcy also need to register for federal and state tax ID numbers.
As a sole proprietor in particular, you may not have to get a tax ID number, but you are welcome to do so. Some people feel it gives added protection against identity theft because they do not have to write their Social Security number on their tax forms. It also may be required in order to open a business bank account.
Variations in State Tax IDs
Each state may have a unique name for its tax ID number. For example, some states call it a state EIN or SEIN, state employer ID or state tax registration. Other states, like Kentucky, have unique monikers like the "commonwealth business identifier."
In addition, the specific department responsible for issuing state tax IDs may vary from state to state. It typically falls under the helm of the secretary of state, department of revenue or chamber of commerce.
If you're not sure whether you need a state tax ID, start by following the federal tax ID guidelines. If you are required by the federal government to register for an EIN, go ahead and assume you need a state EIN as well.
Registering for a State Tax ID Number
Visit your state's secretary of state website (or equivalent department) for more information on how to register for a state tax ID number. You can typically apply online, but mail-in and phone application options may be available as well.
Before obtaining your employer ID numbers, complete your business registration with the secretary of state and apply for a business license if applicable. You'll also need to make sure you already have a federal EIN before applying for a state EIN. You'll be asked to supply this number on your state EIN application.
Fortunately, the online application for the federal EIN only takes a few minutes to complete, and you get your EIN immediately after submitting it. Visit the EIN assistant on the IRS website to get started. If you don't want to use the online application, you can print IRS Form SS-4 and mail in the completed form. You'll be asked to supply your nine-digit Social Security number or individual taxpayer identification number, business address and "doing business as" name along with other details. Applicants who don't have a Social Security number or ITIN can fill out IRS Form W-7 to apply for an ITIN before starting the EIN application process.
Looking Up Your Tax ID Number
If you've lost or misplaced your tax ID numbers, the easiest way to find them again is to look at a copy of a prior tax return or to search through your emails for a copy of the confirmation you received when the EIN was first issued to you. If you opened a bank account using a federal or state EIN, you can also ask the issuing bank to supply the number.
The IRS does not typically issue new EINs, but it can assist you in finding your federal EIN over the phone via the business and specialty tax line at 1-800-829-4933. Be prepared to verify your identity and authorization. Similarly, you can call the state department responsible for issuing state tax IDs for assistance in recovering a lost state EIN.
Keeping Your ID Secure
Although an EIN is not considered confidential information and is actually a matter of public record, it's possible for any type of ID number to be used for identity theft. Therefore, it's important to keep both your federal and state employer identification numbers secure and to only share them when it's essential to do so. For example, you'll need to supply your EIN to employees for tax purposes. If you wish to apply for tax-exempt status or open a business bank account, you'll also need to supply an EIN.
In other words, handle your EIN with the same care and scrutiny that you give to your Social Security number. Any time you need to dispose of documents that display your EIN, be sure to shred them into small strips before sending them to a recycling center. You can also pay a company that specializes in confidential document disposal to come shred and remove your paperwork for you. If you ever need to share your EIN in an online form, make sure it's a website you trust and look for evidence of a secure connection, like an encryption verification.
Remember that having access to an EIN is not the only way identify theft can occur. Identity theft and fraud become greater possibilities when identification numbers are used in conjunction with financial information. To remain particularly vigilant, take extra precautions like regularly checking your credit score and only giving employees a prepaid business credit card.
- IRS: Do You Need a New EIN?
- Tax Foundation: State Corporate Income Tax Rates and Brackets for 2020
- IRS: Lost or Misplaced Your EIN?
- U.S. Small Business Administration: Get Federal and State Tax ID Numbers
- ValuePenguin: EIN Lookup: How to Find Your Own and Other's EINs
- UpCounsel: Is an EIN Number Confidential: Everything You Need to Know