Employer Identification Numbers (EINs) are an essential aspect of business operations, especially when it comes to taxes and legal matters. But who needs one? And how do you apply?
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What is an EIN?
In case you need a quick refresher:
Definition: An Employer Identification Number (EIN) is a unique nine-digit number assigned by the IRS to identify your business. EINs are used for filing taxes, opening bank accounts, hiring employees, and other legal purposes.
Before the IRS introduced EINs in 1974, businesses often used their personal Social Security Numbers for tax reporting, which posed privacy and security risks. A new number specifically for the company helps keep personal information safe and streamlines tax administration.
Who Needs an EIN?
You need an EIN if you fall into one or more of these categories:
Businesses
If you are creating a partnership, limited liability company (LLC), or corporation (B, C, or S), you need an EIN. Sole proprietors also typically need an EIN if the business hires employees, establishes a retirement plan (such as a solo 401(k) or SEP-IRA), files certain tax returns, opens a business bank account (at some banks), or transforms into a partnership.
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Nonprofit Organizations
If you operate under section 501(c) of the Internal Revenue Code as a charity, church, educational institution, or other tax-exempt organization, you need an EIN.
Estates
Estates of deceased individuals that have income reportable on Form 1041 of the U.S. Income Tax Return for Estates and Trusts need an EIN.
Trusts
If you have a trust that is required to file income tax returns or has employees, you need an EIN.
Miscellaneous
Entities that engage in certain types of financial transactions, such as opening a bank account or applying for a business license, may also need an EIN.
How to Apply for an EIN
Applying for an EIN in the US is relatively straightforward. Check the IRS website for instructions to apply online, by fax, or by mail. International applicants can call.
( ! ) Important
It is free to apply for an EIN through the IRS website. Be cautious of third-party websites that may charge unnecessary fees for this service.
Complete the Application
You'll be asked to provide the legal name of your business, the type of entity, the reason for applying, the address, and the responsible party's information. If you fill out the online application, this will be Form SS-4.
Receive Your EIN
After submitting, if your application is accepted, you'll immediately receive your EIN. You can then download, save, and print the confirmation notice for your records. You can request to receive your EIN confirmation by mail, but this will prolong the processing time.
Once you have your EIN, make sure to keep it secure. If changes are made to your business structure or ownership, update your EIN information promptly.
How to Use an EIN for Taxes
Depending on your business structure, various federal tax returns, including income tax returns, will require your EIN. For example, corporations file Form 1120 and partnerships file Form 1065, which will ask for your EIN to streamline the tax paperwork process. Employment tax returns (such as Form 941 for quarterly payroll taxes) will require an EIN as well.
Applying for Business Bank Accounts and Credit
Banks often require an EIN to open a business bank account. The EIN serves as a unique identifier for your business entity. Make sure to have your EIN and additional company information ready when you meet with a bank representative.
EINs are also needed for your business to apply for business credit. It's important to have a separate business credit profile linked to the EIN instead of your personal identity.
How to Hire Employees and Process Payroll
When hiring employees, an EIN is used for payroll and employment tax processing:
W-4 Form
Employees fill out this form to indicate that they are withholding allowances for their federal income tax. The employer needs to include the EIN when reporting these withholdings to the IRS.
I-9 Form
Employers use the EIN to verify the identity and employment authorization of individuals hired for employment in the United States.
W-2 Forms
At the end of the year, employers use the EIN when preparing and distributing W-2 forms to employees, which report their annual wages and tax withholdings.
Tax Reporting
The EIN is used to report employment taxes to the IRS, including federal income tax withholdings, Social Security tax, and Medicare tax.
Employers also use the EIN quarterly (Form 941) and annually (Form 940). The former reports income taxes withheld from employees' paychecks and the employer's portion of Social Security and Medicare taxes. The later is an annual form reporting federal unemployment tax (FUTA).
Avoiding Identity Theft and Scams
Protecting your business's Employer Identification Number (EIN) will be crucial in preventing identity theft and fraudulent activity. Here are some steps to safeguard your EIN:
Secure Passwords & Limited Access
Keep physical copies of EIN-related documents, such as the EIN confirmation letter from the IRS, in a safe and secure location. Store electronic copies in encrypted files or folders with restricted access. Restrict that access to only essential personnel within your organization. Avoid sharing it unnecessarily and be cautious when providing it to third parties.
Dispose of any old or unnecessary documents containing the EIN or other sensitive information by shredding them to prevent dumpster-diving identity thieves.
Ensure that all accounts associated with your business, especially those containing sensitive information like the EIN, are protected with strong, unique passwords. Consider implementing multi-factor authentication for an extra layer of security.
Be Wary of Phishing Scams
Educate your employees about phishing scams targeting businesses. Remind them to never provide sensitive information, including the EIN, in response to unsolicited emails or phone calls.
Keep Software Updated & Secure
Regularly update your business's operating systems, antivirus software, and other security measures to patch any vulnerabilities that could be exploited by hackers.
When conducting online transactions or sharing the EIN electronically, use secure, encrypted channels. Avoid transmitting sensitive information over unsecured Wi-Fi networks or public computers.
Monitor Accounts & Report Suspicious Activity
Regularly monitor your business's credit reports for any suspicious activity or unauthorized inquiries. Promptly report any discrepancies to the credit reporting agencies.
If you suspect that your business's EIN has been compromised or used fraudulently, report it to the IRS, credit bureaus, and law enforcement authorities immediately.
Closing a Business and EIN Deactivation
If you cease operations or close your business, you'll need to deactivate your EIN. It's essential to ensure compliance with all regulatory requirements to avoid any potential issues or penalties in the future, so these steps may help:
1. File Final Tax Returns
First, before deactivating your EIN, ensure that all of your necessary tax returns have been filed, including final employment tax returns and income tax returns. These returns should indicate that they are final returns to signify the end of business operations.
2. Pay Outstanding Taxes
Clear any outstanding tax liabilities, including income taxes, payroll taxes, and any others owed to federal, state, or local authorities. Ensures that your business's tax obligations are settled before closing the account.
3. Submit Form 966
If your business is a corporation, you must file Form 966, "Corporate Dissolution or Liquidation." This form notifies the IRS of your corporation's intent to dissolve and provides details about the dissolution process.
4. Notify the IRS
Contact the IRS to inform them that the business is closing and request to close the EIN account. This can typically be done by calling the IRS Business and Specialty Tax Line at 800-829-4933.
You'll need to provide information such as the reason for closing the business and your final date of operation.
5. Send a Letter
In some cases, the IRS may require a written request to close the EIN account. Prepare a letter requesting the closure of the EIN account, including the business's name, EIN, address, and signature of an authorized individual. Send the letter to the appropriate IRS address based on your business's location.
6. Keep Records
Retain copies of all correspondence, forms, and documentation related to the closure of the EIN account for your records. This documentation may be needed for future reference or in the event of any inquiries from tax authorities.
7. Notify State and Local Authorities
Depending on your business's location and structure, you may need to notify state and local tax authorities of the closure and deactivate state or local tax accounts.
We hope this article has served as a comprehensive guide for you to understand how EINs work. If you have any questions, let us know!