Benefits of EIN for sole proprietor: 8 reasons why an EIN is crucial for your business

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 EIN for sole proprietorship?

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. If you are the only owner of your business and have no employees, 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, or 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 for sole proprietorship required?

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

• Have employees
• Operate as a corporation or partnership
• File employment, excise, or alcohol, tobacco, and firearms taxes
• Withhold taxes on income, other than wages, paid to a non-resident alien
• Have a Keogh plan
• Are involved with certain types of organizations such as trusts or estates

• 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 whose income is reported on the owner's personal tax return and that do not meet any of the conditions listed above.

Reasons to get an EIN even when it is not required

Protect your personal information and reduce identity theft risk

Getting an EIN for your sole proprietorship helps protect your Social Security number from being widely shared. Many clients and vendors require a tax identification number for payments and contracts. Using an EIN instead of your SSN reduces the risk of identity theft, which is a growing concern in 2024.

For example, if you work with multiple clients or use payment platforms like PayPal or Stripe, providing an EIN keeps your sensitive personal data private. This is especially important as cyberattacks and data breaches have increased in recent years.

To take action, apply for a free EIN through the IRS website. This simple step can safeguard your personal information while maintaining professionalism in your business dealings.

Open a business bank account and establish credit more easily

Many banks require an EIN to open a business bank account, even for sole proprietors. Having a separate account for your business finances helps you track expenses, simplify tax filing, and build credibility with clients.

Additionally, an EIN is often needed to apply for business credit cards or loans. Establishing credit under your business name can improve your ability to invest in growth and manage cash flow effectively in 2024.

Start by checking with your preferred bank about their EIN requirements. Then, use your EIN to open a dedicated business account and consider applying for a small business credit card to build your credit history.

Hire employees or contractors without delays

An EIN is mandatory if you plan to hire employees or pay contractors, even if you currently operate solo. Obtaining your EIN early prevents delays when expanding your workforce.

For example, if you decide to hire a part-time assistant or subcontract work, the EIN allows you to handle payroll taxes and issue 1099 forms properly. This ensures compliance with IRS rules in the 2024 tax year.

To prepare for growth, apply for an EIN now. This proactive step keeps your business ready to scale without administrative hurdles.

Enhance professionalism and client trust

Using an EIN instead of your Social Security number on invoices, contracts, and tax documents projects a more professional image. Clients often view businesses with an EIN as more established and trustworthy.

For instance, freelancers using platforms like Upwork or Fiverr can list their EIN for tax purposes, which reassures clients about the legitimacy of their business. This can lead to more opportunities and higher-paying projects in 2024.

To leverage this benefit, include your EIN on all official business communications and tax forms. This small change can improve your reputation and help you win more clients.

How to get an EIN for sole proprietorship

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.

Benefits of getting an EIN for sole proprietorship

Some of the reasons to apply for an Employer Identification Number for your sole proprietorship include:

• Handling payroll taxes
• Issuing 1099 forms
• Using EIN instead of your Social Security number for business transactions
• Projecting a more professional image
• Protecting your Social Security number from identity theft

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 to look up your EIN for sole proprietorship?

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, review your previous tax returns. If neither method works, call the IRS Business & Specialty Tax Line at (800) 829-4933.

How to look up someone else's EIN for sole proprietorship?

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. Use the following approaches:

• Check the business's official website or contact them directly.
• Review any tax documents or invoices received from the business.
• Contact the IRS for guidance on EIN verification.

• 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

What is the difference between federal ID number and state tax ID number?

The IRS issues a federal Employer Identification Number (EIN). It is also known as a FEIN — Federal Employer 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 you need a new EIN for sole proprietorship?

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.

As a sole proprietor, you are legally required to apply for a new EIN if:

• You change your business ownership
• You change your business structure

• 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 you make a mistake when applying for an EIN for sole proprietorship?

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.