Many people are confused about when, as a sole proprietor, they are required to get an EIN (or even what it is). Here we will take you through what an EIN is, when you need one according to the IRS, and even when you need a new one.
What is an EIN?
An Employer Identification Number (EIN) is a nine-digit number that can be compared to Social Security Number (SSN), only for your business. The number is primarily used by the Internal Revenue Service (IRS) to recognize taxpayers and monitor a business’s tax reporting. This number needs to be used on all items that are forwarded to the IRS and the Social Security Administration (SSA). It’s important to remember that should you acquire an EIN; you cannot use it instead of your social security number. The EIN is only used in relation to business activities.
Two reasons the IRS say you need an EIN:
In order to ascertain whether you are required to apply for an EIN, it is useful to consider the following general criteria, as derived from the Internal Revenue Services’ detailed and handy rules. The IRS states that there are only two instances when a sole proprietorship would be required to obtain an EIN:
The first is if, as a sole proprietor, you choose to employ others on your behalf. In this case, you will be legally obligated to acquire an EIN. If your business is a sole proprietorship with no employees and doesn’t submit excise and pension plan tax returns, you are under no obligation to get an EIN. Should this be the case, the sole proprietor only needs to use his/her social security number as the taxpayer identification number, rather than an EIN. This only changes should the sole proprietor make the decision to hire an employee or has the need to file an excise or pension plan tax return at which time it is no longer acceptable to use his or her social security number.
The second instance where a sole proprietor with an existing EIN would need to obtain a separate EIN is if the sole proprietor becomes the sole owner of a Limited Liability Company (LLC) that employs individuals or needs to file an excise or pension plan tax returns.
I have an existing EIN, but when do I need another one?
However, according to the IRS, there are a list of instances where, should you already have an EIN, you would be required to file for a new EIN. The first is if you need to file bankruptcy under Chapter 7 (liquidation) or Chapter 11 (reorganization) of the Bankruptcy code. Should you choose to incorporate then you would also need to acquire a new EIN. The third reason would be if you are a sole proprietor who decides to take in partners and consequently functions as a partnership. The final cause for obtaining a new EIN is if you initiate a pension, profit sharing, or retirement plan.
Thankfully you do not need to apply for a new EIN for the following three reasons:
One, if you decide to alter the name of your business. Two, should you change the location of your business or add locations (these can include new stores, plants, enterprises or branches of the business entity). Three, if you run numerous businesses (counting stores, plants, enterprises or branches of the business entity).
Why an EIN is useful to have:
Nevertheless, it remains worthwhile for taxpayers to get an EIN for the purpose of opening a business bank account, accumulating business credit and minimizing the risk of identity theft. It is mandatory for sole proprietorships to have an EIN before they are able to open a business bank account. This account is useful in that it makes the process of keeping an eye on and running business expenses that much easier. It is only through this account that you are able to accumulate business credit and put yourself in the running for business loans. The benefit of an EIN also lies in how it protects your social security number from exposure. You have less risk of someone accessing your private accounts if your business and personal finances are unconnected.
How do I get one?
Even if you are required to obtain an EIN, the process is relatively easy. TRUiC offers an easy, and free, step-by-step guide of how to apply for your EIN. To help with this process, read more here.