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Do I Need an EIN when Freelancing?
7
Min Read
If you’ve worked as a 1099 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, if you need an EIN, how to get one, and when you’ll use it.
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What Is an Employer Identification Number (EIN)?
The Employer Identification Number (EIN) is a type of Tax Identification Number or nine-digit number 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 the revenue gained from paid invoice templates, 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.) An EIN is different from a business license. Business licenses means you can operate a business and an EIN is for the IRS to track of your business.
Read our resource on if you need a business license here.
How to Use Your Freelance 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. Although EINs can be stolen or business identity theft, the risk is a lot lower.
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.) Again, you'll want to get an EIN because if it ends up in the wrong hands, it’s considered far less of an issue. It is much harder to open a business account without an EIN.
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.
Read more about the benefits of EIN for a sole proprietor.
When You'll Need An EIN
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?
- If you have an eBay 1099 business, you'll need a State tax ID because you'll be collecting sales tax and reporting to your State's department of revenue.
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
- Estates
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers' cooperatives
- Plan administrators
(These are not common for most freelancers.)
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How Do I Get An EIN As A Sole Proprietor?
Signing up to get an EIN 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 to get an 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.
In order to get an EIN, 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
- Legal name of business (if different from first name)
- Address
- 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 or LLC)
- Reason for applying
- The 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 self-employed 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.
Switching From Social Security Number to EIN
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 self-employed 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?
If you have any questions about EINs, consult with a tax or legal professional for advice. Use Bonsai to manage your freelance business and start your free trial today.
What Defines a Verbal Contract?
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
When is a Verbal Agreement Legally Binding?
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
- Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
- Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
- Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
- Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
How strong is a verbal agreement in court?
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
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get started nowWhen are verbal agreements not enforceable?
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
- The sale of real estate or vehicles
- Real estate leases lasting longer than one year.
- Property transfer following the death of the owner.
- The case of a party agreeing to pay debt for someone else.
- Any contract that requires more than a year to fulfil.
- A contract involving and exceeding a specified amount of money (which varies by state).
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
How are Verbal Contracts Enforced?
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
How can you prove an oral contract?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Written vs Verbal Contracts: What's the Verdict?
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Say hello to digital contracts
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
Benefits of written contracts
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Create Professional Contracts with Bonsai
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?
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