An Employer Identification Number (EIN) — also sometimes called a Federal Taxpayer Identification Number — is a nine-digit number used by the Internal Revenue Service (IRS) to identify businesses and certain other entities. Business owners use an EIN to conduct activities that would otherwise require a Social Security Number (SSN).
Many entrepreneurs have questions about EINs and whether or not they need one. So, we thought we’d dive a little deeper and provide a few answers to clear up any confusion.
Who needs an EIN?
The guidelines used by the IRS for determining if an Employer Identification Number (EIN) is required implies that most businesses must have an EIN. Besides, acquiring an EIN is an important step to establishing your business and will help you keep your legal and financial matters in order.
As soon as you launch your business, you’ll need to apply for an EIN. You can wait until you’ve registered your company in the state where you plan to do business, but you’ll need an EIN before you can open a business bank account.
According to the IRS, your business must have an EIN if:
- Your company has employees
- Your business is a partnership or corporation
- You have filed or will file tax returns for any of the following: alcohol, tobacco, firearms, employment, or excise
- You withhold taxes on income paid to a non-resident alien
Or if you’re involved with any of the following:
- Trusts (except with certain Exempt Organization Business Income Tax Returns) grantor-owned revocable trusts, IRAs, or estates
- Plan administrators
- Farmers’ cooperatives
- Real estate mortgage investment channels
- Non-profit organizations
Beyond filing taxes, you may also need an EIN to:
- Open a bank account in the name of your business
- Apply for a credit card in the name of your business
- Apply for business permits
- Apply for a business license
- Apply for a business loan
- Furnish independent contractors with aForm 1099
Another reason you may need to apply for an EIN is for your privacy. For example, if you’re a contractor who works with a large number of clients, disclosing your Social Security Number may expose you to identity theft.
Instead, apply for an EIN. Doing so won’t eliminate your chances of falling victim to identity theft, of course, but it will likely keep the thief from accessing your personal accounts.
When you don’t need an EIN
According to the IRS, you do not need to apply for a new EIN if:
- You change the name of your small business
- Your corporation or partnership declares bankruptcy
- Your corporation is taxed as an S corporation
- You elected to change the way your business entity is taxed onForm 8832 Entity Classification Election
- You change the location of your business (use Form 8822-B — Change of Address — instead)
What is a ‘responsible party” on your EIN application?
The Employer ID Number (EIN) application (Form SS-4) will ask you do identify a “responsible party” for your business. Over the years, there’s been some confusion on the part of business owners regarding the term ‘responsible party.’ Because of that confusion, the IRS issued a clarification.
Now, on the EIN application, instead of asking the applicant to identify the general partner, principal officer, grantor, owner or trustor, it simply asks for the identity of the “responsible party.” Evidently, the IRS wants to be sure that they are talking with the person responsible for the company and that the person responsible signs the application.
How does an EIN Number relate to responsible party?
To apply for an EIN number, you must provide the IRS with a responsible party. This is the person who controls, manages, or directs the business seeking the EIN. If more than one person runs your business, you can choose who you want the IRS to consider the responsible party — only one person can be designated this way.
Just to be clear, no one other than the assigned responsible party can make IRS-related changes. For example, if you change the address of your company, the responsible party must be the person to notify the IRS.
If you need to change your address, you will use Form 8822-B. This form can also be used to change the name of the responsible person. However, the IRS advises companies to consult with a tax specialist or accountant (for liability purposes) before filing Form 8822-B.
How do you apply for an EIN?
Don’t be fooled by online services that charge you to apply for an EIN. The IRS allows you to do so for free on its website where it devotes an entire page to EIN application procedures and provides an online EIN application.
The application process is relatively easy, and very few applicants need expert help to complete the form. In most cases, if you apply online Monday through Friday between 7 a.m. and 10 p.m. local time, you’ll receive your EIN immediately. You may also apply by fax or mail with Form SS-4.
What if you make a mistake when applying for an EIN?
Mistakes happen. If and when they do, you will have to submit a letter — preferably on your company letterhead — to the IRS. You can’t call or go online to make changes, and you don’t want to submit a new EIN application (Form SS-4). That will only cause confusion at the IRS.
Will you ever need to change or get a new EIN?
If you make common changes to your business — like changing the name or address of your business — you won’t need a new EIN. But the IRS states that if the ownership or structure of your business changes, you will need to apply for a new EIN. If you change your EIN, you’ll also need to update the info in your business software. Check out how to change your business name, contact info, or EIN in QuickBooks Online.
Based on your business structure, here are a few instances when you’ll need to get a new EIN.
If you run a sole proprietorship, you will need to change or apply for a new EIN if you incorporate or acquire partners, if you’re the subject of a bankruptcy, or if you inherit or purchase an existing business that you plan to run as a sole proprietorship.
For a partnership, you will need a new EIN if you incorporate, if you have a partnership that is acquired by one of the partners and will now be run as a sole proprietorship, or if you end one partnership and begin a new one.
If your company is a corporation, you’ll need to change or apply for a new EIN if your corporation is issued a new charter by the secretary of state, if you change the structure of your business to a partnership or a sole proprietorship, if you are or become a subsidiary of a corporation using the parent company’s EIN number, or if you change your business structure and a new corporation is created after a statutory merger.
Limited liability companies
For a limited liability company (LLC), you will apply for a new EIN or change an existing EIN if you create a new multi-member LLC under state law, if a new single member LLC is created under state law and files as a corporation, or if you create a new single-member LLC that is required to file excise taxes.
Estates and trusts
The same applies for both estates and trusts. You will need to change or apply for a new EIN number if you form a trust using funds from the estate (not just an extension of the estate), or if you are a representative of an estate that is run as a business following the death of its owner. For trusts, if there is a change in the identity of the trustee or if the beneficiary or grantor changes his or her name or address you will have to apply for a new EIN.
Can you cancel your EIN?
The short answer is no. Once an EIN is assigned to a business, it forever belongs to the registered business. Even if the number is never used to file a federal tax return, it cannot be reassigned to another business, according to the IRS.
An EIN can also never be canceled, but the IRS will close the account upon request. Later, the responsible party may reopen the account by writing to the IRS.
Start your business off right with an EIN Number
A company’s EIN number is unique to each business. It’s used to file your business’s tax return and pay your employees, and most banks or credit unions won’t open a business account until they have an EIN. The nine-digit number never expires, and it will never be reissued to another business. So, no other business will ever have your EIN number assigned to them even if you go out of business. So an EIN helps protect your business’s identity in the same way that your Social Security number helps protect your identity.
Thankfully, the online application process is fairly easy, so there’s nothing standing in your way. Register your business for an EIN today.