Many small business owners, especially those with businesses online, use their personal Social Security number as a tax ID number. For solo entrepreneurs, in a lot of circumstances this is perfectly legal and a simple way to start doing business. Once your company grows, it can be either a smart idea or a legal necessity to get a federal tax ID number. You can get one of these numbers, also known as an employer identification number or EIN, by contacting the IRS.
TL;DR (Too Long; Didn't Read)
Obtaining a federal tax ID number is free.
Who Needs an Employer Identification Number?
If you're running a one-person business out of your home, it's likely that you don't need to take that next step. You won't need more than your personal Social Security number when filing taxes for your business next year. However, after growing your company for a few years, you may be required to get a federal tax ID number. The IRS will look at a number of factors when determining whether you need one, including:
- If you have employees
- If you file employment, excise or ATF tax returns
- If you run your business as a partnership or corporation
- If you withhold taxes from income other than wages for a nonresident alien
- If you have a Keogh plan in place
- If you're involved in certain forms of trusts, estates, nonprofit organizations, farmers' cooperatives or some other organizations
Why Get a Business Tax ID?
The IRS uses an EIN for tax reporting and filing purposes much like it uses Social Security numbers for individuals when they file their taxes. A federal tax ID number separates your business income from your personal finances. You can get an EIN even if it's not required if you feel it would be an advantage in your business dealings.
One reason that's making more and more sense is to avoid identity theft. When identity thieves steal personal Social Security numbers, they can file fraudulent tax claims. This makes it a smart idea to avoid broadcasting your personal Social Security number as much as possible.
If you're working as an independent contractor, an EIN can be useful in getting new clients. It serves as proof that you're an independent businessperson, which means your clients won't have to pay tax withholding if they hire you. The EIN is also a good way to avoid having to give your personal Social Security number to potential clients and their office personnel.
Get a Federal Tax ID Number
Applying for a federal tax ID number is absolutely free and is offered as a service by the IRS. The easiest and fastest way to do this is to apply on the IRS website. They offer a form with interview-style questions that make the process very easy. You'll find hyperlinked keywords and embedded help topics to offer aid in case you're confused or unsure about any part of the process.
At the beginning of the form, you'll determine your eligibility to get an EIN. As of 2012, you are limited to getting one EIN per day. Your principal business must be in the United States or one of the U.S. territories, and you must have a valid taxpayer identification number, such as a Social Security number.
Get all your needed paperwork together before you begin the process. You won't be able to save your progress and come back, as the application has to be completed in one session. If there are 15 or more minutes of nonactivity, the session will time out.
After you finish all the validations in the application, you'll immediately get your federal tax ID number. Download your confirmation notice, save it to your hard drive and then print out multiple copies for your records.
Victoria Bailey has owned and operated businesses for 25 years, including an award-winning gourmet restaurant and a rare bookstore. She spent time as a corporate training manager in the third-largest restaurant chain in its niche, but her first love will always be small and independent businesses. Bailey has written for USAToday, Coldwell Banker, and various restaurant magazines, and is the ghostwriter for a nationally-known food safety training guru.