Have you ever noticed that when you’re self-employed, there’s a lot of acronyms to keep track of? IRS. LLC. EIN. But there’s nothing like TFW you master all the biz lingo and can hold your own when talking about your business.
But before you can impress your colleagues with your fancy business-speak, you got to get clear on what these acronyms mean. Starting with EIN.
Once you establish your freelance business, you’re eligible to receive an EIN, which stands for Employer Identification Number.
This nine-digit number is also referred to as a Federal Tax Identification Number and is assigned by the IRS and used for tax filing and reporting purposes.
Basically, your EIN is like a Social Security number for your business. And it’s formatted like this: 12-3456789.
After getting your EIN, you’ll be able to list it on every form, payment, and document that your business files with the IRS. And, in most states, you’ll also use the EIN for state tax filings and payments.
As you read through the article on EINs below, please keep in mind that, although we’ve made every effort to ensure that this information is accurate, it doesn’t constitute legal advice, nor is it a substitute for legal advice. You should always consult with your attorney for personalized guidance.
Why Is It Important to Get an EIN?
There are a couple of big reasons why you should get an EIN for your LLC.
First off, the IRS works hard, processing hundreds of millions of tax filings and payments annually. Sounds like a joy, doesn’t it? So you want to be absolutely sure that the IRS can accurately track and account for all of your LLC’s payments and filings.
Your EIN is the tool that the IRS uses for tracking purposes. This means following the EIN rules, and using your EIN whenever you need to identify your business, is imperative.
Trust us, there’s nothing worse than having the IRS tell you that they’ve never heard of your business or that they haven’t received payments you’ve made.
Secondly, even though most businesses obtain an EIN even if they don’t have employees, getting an EIN is absolutely necessary if you want to hire employees.
Without an EIN, you won’t be able to withhold taxes from employees’ pay or file employment tax returns.
What’s the big deal? Well, failing to do all of that can result in severe IRS penalties. You certainly don’t want that!
When Is an EIN Required?
Are you forming a business that will be legally separate from yourself? Then you’ll need to get your EIN, end of story.
If you’re forming a corporation, a partnership, or an LLC (including one with multiple owners), you’re required to get an EIN.
If you’re the co-owner of a multi-member LLC that ends up changing over to a single-member LLC, you’ll need to get a new EIN.
But what if you’re a sole proprietor? Well, the rules are a bit different because you’re running a one-person business and you haven’t formed a separate business entity.
In that case, subject to some important exceptions, you can use your personal Social Security number to identify your business.
Translation: you don’t have to get an EIN as a sole proprietor.
The sole proprietor rules also apply if you’re a single-member LLC (SMLLC) and aren’t being taxed as a corporation. Your SMLLC, also known as a “disregarded entity,” will be treated the same way as a sole proprietorship for tax purposes.
Here’s when you need to get an EIN if you’re a sole proprietor:
- You hire employees
- You buy or inherit an existing business that you operate as a sole proprietorship
- You incorporate your sole proprietor business, or form a partnership or a multi-member LLC
- You file for bankruptcy (your bankruptcy estate must obtain an EIN for its tax filings)
Here’s when you need to get an EIN if you’re the owner of an SMLLC taxed as a sole proprietorship:
- You hire employees
- You add one or more additional members to your SMLLC
- You elect to have your SMLLC taxed as a corporation
Note: Whether or not you plan on hiring employees, be sure to get your EIN soon after completing the business formation process.
Should You Get an EIN Even If It Isn’t Required?
Let’s say that you’re a sole proprietor or SMLLC and aren’t required to get an EIN and you can just use your Social Security number. Should you still bother getting an EIN?
The truth is that millions of people who operate as sole proprietors and SMLLC owners do just fine using their Social Security number.
But, here’s something to consider: if you’re a sole proprietor or an SMLLC owner, you can still get an EIN, even though you aren’t required to.
And the great thing about getting an EIN is that you can avoid using your Social Security number to identify your business.
Why You Should Use an EIN Instead of your Social Security Number
1. An EIN Helps You Avoid Identity Theft
Identity theft is a huge—and unnervingly common—problem.
It should come as no surprise that keeping your personal Social Security number as private as possible is super important for avoiding identity theft.
But if you’re operating without an EIN and you get paid more than $600 for your products or services within a year, you’ll need to give your Social Security number to clients.
But, when you have an EIN, you can avoid giving out your Social Security number to members of the public, including your clients and customers. Definitely helpful when it comes to protecting your personal identity!
2. An EIN Helps Establish Your Independent Contractor Status
When you use an EIN on your tax returns and payments, it helps prove that you’re an independent businessperson.
Put simply, your EIN demonstrates that you aren’t an employee; you’re an independent contractor. And that could actually make you more attractive to prospective clients!
3. An EIN Helps Establish Your LLC as a Separate Entity
If you decided to form an SMLLC, you likely did so to avoid being held personally liable for your business’s debts and lawsuits.
But you could go a step further and get an EIN, which will make it abundantly clear that your LLC is separate from you personally.
Using an EIN in place of your Social Security number helps establish your LLC as a legitimate entity, and doing so will help prevent you from being held liable for any of your LLC’s debts.
After all, that’s why you formed your LLC, right?
4. Banks Might Require an EIN If You’re an SMLLC
When you’re working as a sole proprietor, opening a business bank account using your Social Security number is possible.
However, if you’ve formed an SMLLC, some banks might require an EIN before opening an account in your business’s name.
This isn’t actually a legal requirement; it’s just a policy that a lot of banks choose to enforce.
And it’s important to keep in mind that this is the case even if your SMLLC is taxed as a sole proprietorship.
How do you Get an EIN?
By now, you might be wondering: is obtaining an EIN free? Absolutely!
All you have to do is apply for your EIN soon after your LLC is legally formed or your sole proprietorship business is up and running. And once you officially have your EIN, you can start using it right away.
One way of obtaining an EIN is by applying directly through the IRS website. Fill out the application online, pass the system’s automatic validity check, and get your EIN. Just be sure to print out a copy of the confirmation notice, and keep it for your records.
If you don’t want to apply online, you could instead complete and file IRS Form SS-4: Application for Employer Identification Number.
These are the questions you’ll need to answer when applying for an EIN:
- How many members are in your LLC?
- Who is the Responsible Party of the LLC?
- What is the legal name of the LLC?
- What is the trade name/“doing business as” name?
- What does your business or organization do?
Plus, on top of answering all of those questions, you’ll need to describe your employees.
Need help getting your EIN?
If you feel the stress building up just thinking about all of the information you need to provide, and you’re worried about filling everything out correctly, Collective can help make getting your EIN easy!
To make your life super simple, you could sign up for a Collective account and let us do all of the work for you, from filing documents that will legally form your LLC, to submitting the right form to get your EIN immediately.
Stephen Fishman has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.