EIN or Employer Identification Number is a nine-digit number, like social security number, assigned by IRs to a business for the purpose of filing and reporting about federal tax. In order to identify taxpayers EIN number application is used by IRS.
This number is almost used by every type of business including partnership, LLC and corporations etc. It is normally not required for proprietorship business as they can use their social security number but still they apply for this identification number for various other purposes.
Who is eligible for an EIN number?
An EIN number application is necessary for a business if it:
Has some employees
Is operated as a partnership or corporate business
Holds taxes on the income except on the wages paid to non-resident foreigners
Is involved with the organisations listed with IRS
Other applications of EIN
Along with filing taxes EIN number application can also be used for
Applying for a credit card for your business
Opening a bank account for your business
Furnishing Form 1099 as independent contractor
Applies for permit for your business
When a sole proprietor should apply for EIN
EIN number application can be necessary for a sole proprietor if:
He has Solo or Keogh 401 retirement plan
He hires employees
He initiates a LLC or partnership business
He inherits or buys an existing business to operate it as a sole proprietor.
He is filing for bankruptcy
His bank requires it to open your business account
Other reasons to apply for EIN
There are certain other reasons which compel you to apply for EIN number even if it is not need as a sole proprietor.
Maintaining privacy: The use of social security number can expose the identity of a contractor working with large number of clients. If you provide personal services on contract basis then your client can withhold 28% of your payments, if you do not have an EIN.
Avoiding identity theft: The use of EIN number application, on the other hand, helps in reducing the risk of identity theft. It keeps your personal accounts safe from burglars. Your social security number can be used by the thieves and burglars to obtain tax returns and file tax returns fraudulently. EIN allows you to keep your social security number safe for long.
Establish the status of independent contractor: EIN number application can also be used for tax payments and returns to help in establishing your status as an independent contractor instead of an employee. It will increase your importance among your prospective clients.
For credit purposes: The EIN number application can help in proving the trustworthiness of the business dealing in financial matters where reputation counts. The use of EN is also effective for supporting personal financial dealings along with establishing credit for a separate business.
Maintenance of Credit: EIN makes it easy to establish the credit structure of a corporation or LLC business better than a proprietorship business as it can be used to influence credit report of the business.
Open business checking account: the business checking account opened by using EIN can help in differentiating personal accounts from business accounts.
Establish business credit file: EIN number application makes it easy for credit bureaus including Experian, Equifax and D&B, the Small Business Financial Exchange, to establish credit file of the business.
Obtain business credit card: After you have established credit in the market then you can use your EIN to apply for credit card for you business. You can try with small banks in your community to provide you business credit card if your business is new.
Apply for small loans: After establishing credit worthiness you can use your RIN to apply for smaller loans.
Obtaining EIN number
One can easily and quickly obtain EIN number free of cost just by applying directly on the website of IRS through its online EIN Assistant tool. You can also download the Application for Employer Identification Number as IRS Form SS-4 and send it by post, if you have any doubt in applying for it online. In fact, if you do not know how to fill up the form, then you should also download the form and fill it offline with the help of someone knowledgeable.
Thus, EIN number application is important for all types of businesses new or old, partnership or proprietorship, LLC or corporate as it helps IRS to identify its existence in the market.