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Do I Need an EIN when Freelancing?
If you’ve worked as a freelancer for any length of time, you’ve probably been asked to provide your Social Security number or an EIN for tax purposes. While professionals are using both with no issues, experts have leaned on one being better. In fact, there are benefits to using the EIN that you may have not considered. Here is everything you need to know about this special identifier, including who might be eligible, how to get one, and when you’ll use it.
What Is an EIN?
The Employer Identification Number (EIN) is a unique identifier given to those who apply online via the IRS website. It is used by companies, or professionals acting as a company or sole proprietorship, to tie your revenue and expense activity to your taxes when you file each year. It is free to get this number; never go through a third-party website or pay a fee to acquire an EIN. There are quite a few ads out there offering to sell you a service to sign up for an EIN, but as you’ll see below, this is a simple process that anyone can do alone. The IRS doesn’t charge to get one, so don’t allow others to profit off providing this service.
(You can also apply by phone, fax, or mail, but online is the easiest and most efficient way to apply.)
How to Use Your EIN?
Many freelancers prefer to use an EIN instead of their social security number when filling out freelance paperwork, pay, and tax forms. This makes sense, as social security numbers should be given out sparingly, and many professionals feel that using an EIN is more secure. The EIN is tied solely to your business finances, and not to any part of your personal life (such as your credit history, medical records, insurance policies or retirement accounts.) If your EIN ends up in the wrong hands, it’s considered far less of an issue.
You would put the EIN on your freelance paperwork, such as the W9. (There is currently a space to put either your SSN or your EIN.) As a result, when you get your 1099-Misc or 1099-K at the beginning of each tax year, you’ll have this EIN number listed instead of your SSN. You would still file taxes the same. Nothing will change in that manner.
Should I Be Using an EIN as a Freelancer?
"Do I need an EIN" is a question often asked by freelancers, and the answer is easy: No, you don’t. It’s not mandatory, unless you have employees working for you and you are classified as such. Many freelancers, then, choose to keep using their own social security number and are very comfortable doing so. However, it’s becoming common practice for businesses to ask for an EIN, so don’t feel that it will make you any more difficult to work with if you require them to list one for you.
There are a few less common instances where you’ll need to have an EIN. These are not usual for most freelancers and include people who:
- Need to file tax forms for Employment, Excise, or Alcohol, Tobacco and Firearms
- Withhold taxes on income, other than wages, paid to a non-resident alien
- Have a Keogh plan?
In addition, according to the IRS website, those involved in any of the following organizations will likely need an EIN:
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers' cooperatives
- Plan administrators
(These are not common for most freelancers.)
How Do I Get an EIN?
Signing up is easy. Any U.S.-based business can apply for one at the IRS website. You’ll simply need to have a valid TIN (Taxpayer Identification Number) to start the process. A TIN can be:
- A Social Security Number
- An existing Employer Identification Number
- An Individual Taxpayer Identification Number
If you do not have one of the above, you’ll need to get one first.
Once you’re ready to go, the entire process of applying for the EIN is quick. In fact, the IRS website requires you to fill it out in one sitting, and take no more than 15 minutes to do so. You cannot stop, save, or start again after you begin the session.
You’ll be asked to provide the following pieces of information on your application:
- Legal name of the individual or entity (company name) of person applying for EIN
- Name of business (if different from first name)
- Name of responsible party (usually the same person applying)
- Tax Identification Number
- If you are an LLC (and number of people in LLC, if applicable)
- Type of entity (most will choose sole proprietor)
- Reason for applying
- Highest number of employees you expect to hire
- Principle work of business and services sold
- If you’ve ever had an EIN and what that previous number was
You can get more instructions on how to fill out this form here. You may also choose to fill out the paper version of this form, or download it to help you prepare for the online application. It can be found here. The online service may be limited to Monday through Friday, during select hours. Be sure you are familiar with the time it is available in your zone, and apply during that window.
When an EIN Is Best
According to the IRS website, “If you have a legal residence, principal place of business, or principal office or agency in the U.S. or U.S. possessions, you can receive an EIN online and use it immediately to file a return or make a payment.”
This makes it an efficient way to become tax-compliant for your freelance business. Since you’ll need to claim freelance income if you make more than $400 in a year (and you’ll also get a 1099-misc from any single client who pays you more than $600 in a year), the EIN will come in handy your first year of freelancing. In fact, if you’re the type that likes to plan and make things easier for new clients, you can apply for your EIN before you ever take your first project, and provide this info on all invoicing paperwork you fill out.
What if you’ve provided your social security number in the past, but now want to use an EIN? You can simply ask your clients to use a newly-filled out W9 for their tax and payroll records. Remember that you should be using secure methods of sending this information – not as an email attachment! Fill out the W9 the same way you have with your SSN, but use the EIN instead. Your clients should be happy to make the change and include the EIN on your end-of-the-year 1099-misc, instead of your SSN.
The EIN and PayPal
Remember, if you use PayPal for your primary billing tool, you’ll want to update your profile there, too. If you already have a business account with PayPal, you can change this info in your profile, under “My Business Info”. If you don’t have a business account, you may not be able to add this info until you near the $20,000 annual earning threshold that would trigger a 1099-K to be issued, and you’ll be prompted by a member of the PayPal team to add that info. (If you’re certain that you’ll earn $20,000 and also have over 200 transactions post to your PayPal account, you will get the 1099-K issued and will have the chance to specific you’d like to use an EIN instead of a Social Security Number.)
Clients are usually unable to change your info once a 1099 has been processed, so be sure you get them your change request by the end of the fiscal year! You don’t want to make things for difficult for them. Send any new W9’s well in advance of the December 31st deadline – and earlier, if possible! Be sure to check your 1099’s each spring to be sure that they have your correct EIN, especially if it is the first year you use one.
An EIN is becoming industry standard for freelancers and is a secure way to share your tax info for reporting purposes. Since signing up is free and almost instant, there’s no reason to delay. What are you waiting for?