Why Does A Sole Proprietor Need To Get An Ein
In most cases, a sole proprietor does not need to get an EIN. Usually, it is totally acceptable for a sole proprietor to use his or her social security number in the place of any other tax identification number.
However, there are some times when a separate number is necessary. In fact, in some instances, having a separate EIN for ones business may even be preferable. Read on to get a rundown of when having a separate EIN is required and makes sense for your sole proprietorship.
When It Is Required
A sole proprietor must get a separate EIN for a business if any one of these things are true:
- That individual wants to hire employees, wants to open a Keogh or solo 401, or chooses to file for bankruptcy protection.
- When that individual plans to purchase an existing business and operate it as a sole proprietorship
- When a partnership or limited liability corporation is formed, or incorporated.
Finally, while not required by the federal government, some banks will not allow you to open a bank account in your business name if you do not have a separate EIN.
When It May Be Preferable
No matter where your sole proprietorship falls on this scale, you can find everything you need to get your status set at www.irs-ein-tax-id.com.
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It Helps Establish You As A Professional Business
Do you need an EIN when freelancing? When youâre first starting out, every little bit helps â and an EIN can make a big difference.
Having an EIN conveys to others that youâre 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.
How Do I Look Up My Ein
The most straightforward method for finding a lost or misplaced EIN is calling the IRS Business & Specialty Tax Line via 800-829-4933 and asking them to search for your business EIN. Besides that, there are other options that you can take as well:
- Check your mails and emails to see if there are any letters and notifications from the IRS. Theyâll usually contain your business EIN.
- In case you used the EIN to open your business account, try contacting the bank for the EIN.
- If you used the EIN to obtain local and state licenses, you can also contact them for the same.
- In case you have registered your business with a credit agency, consider getting a credit report. It will have the EIN indicated in it.
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When Is An Ein Unnecessary
While EINs are necessary for corporations and partnerships, most sole proprietorships actually do not need them.
Similarly, single-member LLCs do not need EINs either, unless the LLC is required to file excise tax returns or employment tax returns. When an EIN is not required, the LLC is said to be a disregarded entity because the business income and expenses are reported on the sole owners tax returns, so a separate tax return is not necessary.
Although trusts is one of the common types of entities that obtain EINs, you will probably not need an EIN if you have created a revocable living trust. That is because these types of trusts typically use the grantors Social Security Number during his or her lifetime. When the grantor dies, his or her revocable living trust will become irrevocable and will require an EIN at that time.
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 â 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.
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Can I Have More Than One Ein For My Fictitious Business Names
Whether you use one fictitious business name or dozens, you are covered by a single EIN number because the IRS assigns Employer Identification Numbers based on the official legal name of a business only.
The only legal requirement for fictitious names is that DBAs be registered by the state so consumers and others can find out exactly who owns the company.
Therefore, you will be required to obtain an additional EIN number for each new legally distinct subsidiary of the company, but not for new divisions, branches, offices, stores, or names.
Do I Need An Ein If I’m Self
Businesses that don’t need an EIN are those that are not required by the IRS to file taxes separately from their personal income taxes. These businesses also must not meet any of the conditions listed above. A self-employed individual acting as a sole proprietor who doesn’t pay employees, for example, does not necessarily need an EIN.
“However, it may still be a good idea for a sole proprietor who doesn’t need to get an EIN to obtain one anyway, especially since doing so is free and easy on the IRS website,” says Logan Allec, a certified public accountant and founder of the personal finance site Money Done Right.
“For example, having an EIN for your business will allow you to use your EIN rather than your Social Security number when filling out Forms W-4 and W-9,” Allec says. “Having an EIN can also help with being approved for a business bank account or getting a loan for your business.”
There are other potential benefits of obtaining an EIN as well. Business owners can use them to keep personal and business finances separate. You won’t have to share your Social Security number with customers or clients for business purposes. And an EIN can help protect your personal credit score.
Quick tip: An EIN can help you protect against identity theft because you can use it instead of your Social Security number on official documents.
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What Is An Ein And Does Your Business Need One
An Employer Identification Number is relatively easy to obtain and a usefulsometimes mandatorytool when starting a new business or considering a side business.
An Employer Identification Number is mandatory for some businesses and optional for others. But in general, an EIN is necessary for independent contractors and small business owners. Understanding who needs to apply and the benefits that come with having an EIN can give your business a real advantage.
Gather The Necessary Business Information
The first step involves providing all the necessary details about your business to the government. This includes the following:
- Name of your sole proprietorship firm
- DBA name of the business, if applicable
- Type of business and principal business activities
- Contact information
- Your name and Social Security Number or Individual Tax Identification Number
- Number and type of business employees
- Whether or not you intend to pay $1,000 or more in employment tax each year
- Reasons for applying for an EIN
- Last date of your sole proprietorships income tax year
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Determine If Youre Eligible To Get An Ein
You are eligible for an Employer Identification Number under two conditions:
- Your principal business is located in the U.S. or within a U.S. territory.
- You have a valid identification number, such as a Social Security Number. In case you donât, you may designate the duty of getting an EIN to a âresponsible partyâ. The IRS defines âresponsible partyâ as someone who manages the businessâs finances. While someone else can do the application, the âresponsible partyâ must fill out the third-party designee section and also sign Form SS-4.
When Does A Sole Proprietor Need An Ein
IRS regulations do not require a sole proprietor to have an EIN. Instead, they allow the business owner to use their Social Security number as their taxpayer identification number. However, according to the IRS, an EIN is necessary when:
- You file pension plan returns
- You file Chapter 7 bankruptcy
- You file Chapter 11 bankruptcy
- You form a corporation, limited liability company, or partnership
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Tax Id Numbers At A Glance
A tax ID number is not required if you operate a sole proprietorship or an LLC with no employees, in which case you would simply use your own Social Security Number as a tax ID. But you must obtain an EIN if you are a sole proprietor who files pension or excise tax returns. Even partnerships without non-partner employees are required to have tax ID numbers.
Additionally, there are certain instances where you will need to obtain a new EIN :
- Existing business is obtained by someone who plans to run it as a sole proprietorship
- Business changes from a sole proprietorship to a corporation or partnership
- Business changes from a partnership to a corporation or sole proprietorship
- Business changes from a corporation to a partnership or sole proprietorship
- Individual owner dies, and business is taken over by the estate
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Apply For Ein Via Fax Or Mail
If not online, you can also apply for your sole proprietor tax id through the mail or fax. In this case, you need to print out a paper application. All the details about your company are the same as that you offer in your online application.
Once you have filled the application, you can mail it or fax it to the number mentioned on the form. Make sure to mention your fax number or return address within your application. Alternatively, you can apply over the phone. However, this option is only available to sole proprietors based in some foreign country.
Once you have submitted all the information, you need to wait for the government to send you the sole proprietorship EIN. Following that, you can start using your EIN on tax documents and banking forms for your firm.
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Limited Scalability & Life Of Business
Your business model may be dependent upon the ability to hire and retain employees who will be integral to the growth and success of your organization. In a sole proprietorship, you are not able to hire any full-time or W2 employees. You can still hire freelancers and contractors, but there are certain limitations on how many hours a single employee can work in that capacity depending on the state in which you live. Without full-time employees it can be harder to retain talent, which can be especially damaging to a smaller company whose success is dependent on a limited number of contributors.
Additionally, if something should happen to a sole proprietor, like a planned exit or death, there is no structure in place to make sure the business can continue on under someone else. Although someone else can continue to run the day to day business, they would essentially be doing so as a new business, at least on paper. If you structure your business as an LLC, C-corp, or other formal model, your business may continue on as long as business filings are kept current and all the required licenses are maintained.
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 itâs 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, youâll start building a credit history for your business on your business credit card.
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Should I Form An Llc Or Sole Proprietorship
Depending on your business, it will be beneficial to create either an LLC or a sole proprietorship. A sole proprietorship is best suited to small businesses with low risk and low profits. The business will not have a wide range of customers but rather a small, dedicated group. Sole proprietorships usually start as hobbies and become a form of business. The reasons to start an LLC would be the opposite of the reasons above. The business is associated with some risks, the possibility for very large profits, a large customer base, and in a position to benefit from certain tax structures.
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 â preferably on your business’ letterhead â 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 — this will just make things more confusing for the IRS.
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Federal Id Number Vs State Tax Id Number: What’s The Difference
The IRS issues a federal Employer Identification Number . They are also known as FEIN â 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.
Why Can’t I Just Use My Social Security Number
When the IRS mandates an EIN, you don’t have a choice. But here’s a key reason why it’s a good idea to use an EIN for business even when it’s not required: avoiding identity theft.
An EIN helps keep your personal and business finances separate. It reserves your Social Security Number for personal needs and keeps identity thieves from ripping off your personal assets. The IRS recommends using your Social Security Number only if you have a very simple business structure and no employees.
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Difficult To Get Contracts
Some companies, government agencies, consulting groups, etc. will not deal with unincorporated companies, either because they consider that a sole proprietorship does not have the same level of legitimacy and professionalism as an incorporated company, or that hiring a sole proprietor increases the risk of Tax authorities treat the person as a employee rather than an independent contractor.
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 . 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
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Payment Of Taxes On Business Income
A sole proprietor pays taxes by reporting income on a T1 income tax and benefit return.
If you are a sole proprietor, you or your authorized representative have to file a T1 return if you:
- have to pay tax for the year
- disposed of a capital property or had a taxable capital gain in the year
- have to make Canada Pension Plan/Quebec Pension Plan payments on self-employed earnings or pensionable earnings for the year
- want to access employment insurance special benefits for self-employed persons
- received a demand from us to file a return
You also need to file a return if you are claiming an income tax refund, a refundable tax credit, a GST/HST credit, or the Canada Child Benefit. You should also file a return if you are entitled to receive provincial tax credits.
The list above does not include every situation where you may have to file. If you are not sure whether you have to file, call 1-800-959-5525.