Benefits and Uses of a Federal Tax ID Number

A federal tax ID number - also called a tax identification number or an employer identification number - is a nine-digit number issued by the IRS to identify a business. Just like individuals have Social Security numbers to identify themselves, businesses use a tax ID number for identification on government, banking and tax forms. Not every business needs a federal tax ID number, but there are benefits to having one.

You need to apply for a federal tax ID number with the IRS if any of the following apply to you:

• You operate a non-profit organization, partnership, S corporation, C corporation or LLC.
  
• You are involved with a trust, IRA, REIT, plan administrator or an estate.
• Your business has employees.
• You file an employment, excise, or alcohol, tobacco and firearms tax return.
• You have a Keogh plan.

Sole proprietors and single-member LLCs do not need to apply for a federal tax ID number if they don't meet any of the preceding criteria. Instead, the business owner can use his personal Social Security number in lieu of a tax ID number to identify himself and his business.

Your business will use its tax ID number on many legal, accounting and administrative documents. You'll need to provide a tax ID number in these situations:

• To file your state and federal tax return.
  
• To apply for a business license.
• To open a business bank account or apply for a business loan.
• To hire employees and file payroll taxes.
• If a client requires that you complete a W-9.

Even though sole proprietors and single-member LLCs aren't obligated to get federal tax ID numbers, many choose to do so anyway. Obtaining a federal tax ID number allows a business to build a business credit history that's distinct from the individual's personal credit history. Obtaining a federal tax ID number also can reduce the risk of identity theft. In addition, some business owners feel more comfortable providing a tax ID number rather than their personal Social Security number to clients and other businesses.