Are you wondering what is an EIN used for? The 9-digit ID number comes in handy at separating your personal and business finances and at the same time gives legitimacy to your business. But it does not end there. The Employer Identification Number (EIN) has plenty of other uses that include:
Filing tax returns
If you have a partnership, multi-member LLC or you have employees, you can’t file returns without an EIN. This means that when tax day comes and you don’t have EIN, you can’t file the returns, which puts you at the risk of getting penalized.
If you are running any of the above-mentioned businesses, you should get the EIN as soon as possible. Remember that the IRS can take up to five weeks to issue you with the number, so don’t wait until the tax day nears to find the number.
If you have already applied for the number, but haven’t been assigned one, you should notify the IRS about it so you can be allowed to file the returns.
Besides the EIN allowing you to file for returns, it also allows you to get certain deductions, such as the home office deductions and others. Without the number, you have lower chances of deductions, so hurry and get the identification number.
As your organization grows, so is the need for employees. Unfortunately, when you are looking to bring other people on board, you will need to get an EIN since a multi-member LLC can’t file or pay taxes as an LLC. Each of your employees will have to file their taxes separately.
As a business owner, the EIN helps you set up payroll, and the IRS uses the business’s EIN to track the payroll taxes.
You will also need the EIN to register for the employer taxes in your state.
The number gives you a professional look.
Even if you are a single-member LLC, it doesn’t have to be obvious. And the EIN can help with this. For example, when you are billing a client, and you give them your EIN instead of your social security number, you appear more professional and organized, which increases their chances of working with you in the future.
When you are looking for business, the EIN shows that your business has its own separate identity, which increases your chances of getting tenders and other forms of business.
The number also gives you a corporate veil that protects you (the business owner) from personal liability for your business’s debts.
EIN has implications for various aspects of business operations, including protection against the cost of compensation claims. It helps establish a clear legal separation between the business entity and its owners, shielding the business owners’ personal assets (shareholders, partners, etc.) from being directly targeted to cover the costs of claims against the business. Properly obtaining an EIN indicates that your business is properly registered with the appropriate authorities. This is important in determining the correct classification of workers as employees or independent contractors. Moreover, an EIN is often required to obtain workers’ compensation insurance, which provides financial protection to injured or ill employees.
An EIN is also necessary for complying with various federal and state employment laws. Non-compliance with minimum wage, overtime, and workplace safety can lead to legal actions and compensation claims by employees. While an EIN is a valuable tool, it’s just one aspect of comprehensively protecting your business from compensation claims and other liabilities.
You keep your SSN more private.
Using your SSN for business transactions can complicate tax reporting and potentially lead to errors on your tax returns. Using an EIN for your business allows for accurate and proper tax reporting, making it easier to track business income and expenses, separating it from personal finances.
Since you don’t use your social security number (SSN) often, you keep it more private, reducing the chances of it getting stolen and losing your hard-earned profits.
According to the Treasury Inspector General, 285, 670 EINs were stolen or falsely obtained in 2011 (the year with more accurate data), meaning that EINs can still be stolen, but the practice isn’t as rampant as SSN theft.
You use EIN to open a bank account.
As a business owner, you must have a business bank account that will help you easily separate your personal from professional finances. The bank account also simplifies the process of tracking and managing your professional expenses, and as a result, you can make better financial plans for your business.
With an active business bank account, you can access payrolls services, small business loans, and financial services that make it easy to run your business.
While a business bank account is vital for your business growth, you can’t open it without an EIN.
You use EIN to build business credit.
The same way the SSN tracks your personal credit, EIN tracks your business credit, and this is what lending and credit agencies use to determine how creditworthy you are. This means that for you to establish strong business credit, you need to track it. And since you can’t track it without EIN, this is the first thing you should get.
Having good and strong business credit gives you access to better interest rates, loans and other services that help you grow and expand your business.
How to get an EIN
We have been talking about the areas you need the EIN, and as a business owner, you have seen the value of having the number. Now the big worry is, how to get an EIN.
To get the number, you need to apply for it, and you can do it online, by mail or by fax. Regardless of the method you use, you will have to fill a form (Form SS-4) and give all the relevant information.
As you apply for the number, you should note that it’s free, and no person or website should charge you for it. You can apply for multiple EINs (if you have multiple businesses), but you are limited to one EIN application a day.
What information do you need to get an EIN?
You need to give basic information about your business. This includes:
- The type of business you have (partnership, LLC, sole proprietorship or any other)
- The services that your business provides.
- The date your business began.
- Reasons you are applying for the number. You can apply for the number for various reasons such as: starting a new business, looking to hire employees, opening a bank account, appearing more professional and many others. You should give the exact reason for your application.
- The name and the SSN of the person owning, operating and controlling the business. If you have a sole proprietorship, you need to put down your name, but if it’s a partnership or a jointly owned business, you should pick one person’s name.
You definitely need an EIN for your business to grow, and thankfully, it’s easy and free to apply for one. You get the number immediately after your application has been verified, and you can use the number right away and take your business to stardom.