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.
Who Needs a Federal Tax ID Number
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.
Federal Tax ID Number Uses
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.
Benefits of a Federal Tax ID Number
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.