Benefits of EIN for Sole Proprietor: 8 Reasons Why an EIN Is Crucial for Your Business

9

Min Read

David Maina

An EIN is a valuable asset for any business — even if you’re not legally required to have one. By getting an EIN, you can take advantage of a number of benefits, including easier tax filing, hiring employees, and establishing business credit.

Here, you'll learn what an EIN is, when it is required, how to apply for one, and the benefits it offers. Let's get started.

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What is an Employer Identification Number (EIN)?

An EIN, or Employer Identification Number, is a nine-digit number that is assigned to businesses by the Internal Revenue Service (IRS). It’s also known as a federal taxpayer identification number, and it helps the government identify businesses for taxation purposes. It can be thought of it as the business version of a person's Social Security Number (SSN).

Sole proprietors don’t need an EIN unless they have employees. In other words, if you are the only owner of your business, you don’t need an EIN. Without an EIN, you won't be able to buy an existing business, inherit a company, form a business partnership, and more.

However, it may be a good idea for a single proprietor who does not need an EIN to get one simply because doing so is quick and simple on the IRS's website. It offers several potential benefits, which we will talk about below.

When Is an EIN Required?

EINs are required for most business entities, but not all. Businesses that fulfill any of the following criteria must have an EIN:

  • Run as a corporation or partnership
  • Hires employees (household employees included)
  • Has a Keogh retirement plan
  • Administers estates or trusts
  • Files taxes with the IRS for employment, tobacco, firearms, or alcohol
  • Withholds taxes for payments made to non-resident aliens
  • Has involvements with non-profits, plan administrators, or farmers' cooperatives

Businesses that do not require an EIN include those that are not required to file taxes separately from their personal income taxes by the IRS. These business entities also must not satisfy any of the conditions we've mentioned above.

How to Get an EIN

You can apply for an EIN online through the IRS website – the process is simple and takes just a few minutes. You’ll need to provide some basic information about your business, such as the name and address, trade name, as well as your Social Security number.

If you apply online Monday through Friday between 7 a.m. and 10 p.m., local time, you should receive your EIN within minutes. You can also fill out Form SS-4 by fax or mail.

The problem with using fax or mail, though, is that they take much longer than online applications. For instance, you'll get your EIN within three days if you send a fax. And if you send a mail, it can take up to four weeks for your EIN to be processed.

To obtain an EIN, your sole proprietorship must be located in the United States and you must have your own tax identification number, such as a social security number.

The Benefits of Getting an EIN

Some of the reasons why you may need to apply for an Employer Identification Number for your sole-proprietorship include:

It helps establish you as a professional business

Do you need an EIN when freelancing? When you’re first starting out, every little bit helps – and an EIN can make a big difference.

Having an EIN conveys to others that you’re a professional business, not just someone running a side hustle out of your home. That can make it easier to get loans, attract customers and partners, and generally be taken more seriously.

It helps you track business expenses

If you’re keeping track of your business expenses, you can use your EIN to segregate them from your personal expenses. That makes tax time a lot simpler and can save you money come tax time.

Also, by keeping track of your business expenses, you'll be able to take advantage of tax deductions, saving even more money.

It helps minimize the risk of identity theft

Your Social Security number is one of the most important pieces of information about you. Giving it out to every business you work with leaves you vulnerable to identity theft. Identity thieves can get hold of your personal social security number and use it to file fraudulent tax returns. With an EIN, you can keep your SSN for personal use and still have a unique identifier for your business.

It helps with bookkeeping and accounting

Keeping track of your business finances can be a hassle as a business owner, but it’s a lot simpler when you have an EIN. An EIN makes it easy to identify business transactions and keeps your bookkeeping in order.

It makes it easier to hire employees

If you plan to hire employees in the future, getting an EIN now will make the process much simpler. You won’t have to provide your Social Security number on new employee paperwork, and you’ll also have a dedicated account for payroll taxes. An EIN also allows you to withhold employee taxes and contribute to social security and medicare.

It helps you file business taxes and avoid tax penalties

If you’re self-employed or you're an independent contractor, you’re responsible for paying both your personal and business taxes. By getting an EIN, you can better organize your business taxes separately from your personal taxes, making the process a lot simpler. You’ll also be able to avoid any penalties for late or incorrect filings.

It makes it easier to apply for a business bank account

A business bank account is a great way to keep your business and personal finances separate – it allows you to to track your business income and expenses with ease.

To top it off, having a business bank account can make it easier to get loans and other financing in the future.

Some financial institutions allow sole proprietors to set up a business bank account without an EIN, but others have more rigorous requirements. So you might want to check in with your bank first.

It helps speed up business loan applications

If you’re thinking of applying for a business loan down the road, getting an EIN now can help speed up the process. By providing your EIN to the lender, you’ll show that you’re serious about your business and have taken the necessary steps to get started.

It makes it easier to establish business credit

One of the benefits of having an EIN is that it can help you establish business credit. Business credit is separate from personal credit, and it’s important to have it if you want to get a loan or lease in the future. By using your EIN on loan and credit applications, you’ll start building a credit history for your business on your business credit card.

It enables you to build trust with vendors and customers

If you’re doing business with other companies, an EIN can help you build trust. Vendors and customers might be more comfortable doing business with a company that has an EIN, knowing that it’s legitimate and has been vetted by the IRS.

There are other benefits to getting an EIN as well. For example, if you have a partner in your business, you can use your EIN to create a partnership agreement. Or, if you decide to change your business structure to an LLC or corporation later on, you’ll need an EIN to do so.

How can I look up my EIN?

What if you misplace your Employer Identification Number (EIN) or forget it? If you can't find your EIN after previously applying for one, there are numerous approaches to track it down.

If you opened a business bank account using your EIN, contact your bank and request your EIN. If you filed a prior tax return for your company, look into your previous tax returns. If neither of these methods works for you, call the IRS' Business & Specialty Tax Line at (800) 829-4933.

How can I look up someone else's EIN?

If you run a business that does a lot of transactions with other firms, you may need to check up EINs from time to time. You may also wish to verify the information of another company by looking up their EIN.

You can look up a company's EIN for free using the SEC's EDGAR system if it is publicly listed and registered with the Securities and Exchange Commission (SEC). For non-profits, you may search for them on Guidestar.

If a business isn't registered with the SEC and is privately owned, finding its EIN may be more difficult. Here are some approaches you can take:

  • Contact the firm's accountant or financing department and inquire about the EIN
  • Look for the firm's W2, or any other local or federal filings that may be found online
  • Hire a service or use a paid database to look up the EIN

Federal ID Number vs State Tax ID Number: What's the difference?

The IRS issues a federal Employer Identification Number (EINs). They are also known as FEIN — Federal Employee Identification Number.

A state tax ID number, also known as a state employer ID or state EIN, is similar to a federal EIN. It's your state's version of the federal EIN and has the same goal: a unique number linked with your sole proprietorship for tax purposes.

There is no distinction between federal and state tax IDs except for which one you use to pay your federal or state taxes. The rules concerning how to acquire a state tax ID and what it must be used for may differ depending on your state's tax regulations.

To qualify for business licenses and permits, hire and pay employees, and file state and local taxes, you'll need a state tax ID number as a minimum.

When will I need a new EIN?

Generally, you will only need to submit a new EIN Application if your business undergoes a change in business ownership or structure. A new EIN is not required if you rename your company or move it to a different location.

That said, as a sole proprietor, you're legally required to make a new EIN application if:

  • You are undergoing bankruptcy
  • You incorporated (read about the benefits of incorporating)
  • You took on partners and ran your business as a partnership
  • You bought or inherited an existing firm that you run as a sole proprietorship

What if I make a mistake when I apply for an EIN?

If you make a mistake, you'll need to send the IRS a letter — preferably on your business' letterhead — explaining what went wrong. You should include your own name as the responsible party, as well as your business's name, in order to clarify things. It's also a good idea to also include the EIN confirmation notice you received.

You can't call or go online to make adjustments, and you don't want to file a new EIN application (Form SS-4) -- this will just make things more confusing for the IRS.

Bottom line

Whether or not you're required to have an EIN, there are several good reasons to get one. It can help protect your identity, make you seem more professional to others, and makes tax filing simpler. So if you're thinking about starting a sole proprietorship, it's definitely worth getting an EIN.

David Maina
David is an experienced B2B financial copywriter, specializing in content related to accounting, financial planning, and small businesses. Over the years, he has helped fintech brands win more traffic and skyrocket conversions with engaging, long-form content. A nerdy interest in numbers, and passion for creative writing drives him to create financial content that's truly unique. You can reach him at financeandinsurancewriter.com

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