EIN vs Tax ID: The Fundamental Differences
Updated November 16, 2022.
How do you know whether you need an EIN or a Tax ID? Do you even need one at all? Although there are fundamental differences between the two, chances are you'll need one if you're running a business.
While the terms EIN and Tax ID are often used interchangeably and the two are very similar, there are fundamental differences you must be aware of to be able to use them appropriately—we'll discuss what the differences are.
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What Is an EIN?
An EIN is an Employer Identification Number issued to entities conducting business in the United States and its territories by the Internal Revenue Service (IRS). This unique 9-digit identification number is used by government agencies to identify a business in order to track tax payments and filings and issue business licenses and permits. Banks and other companies also use it to identify a business when opening business bank accounts or other credit accounts.
An EIN is mandatory if the company has or will have employees and a Keogh plan or files certain taxes. The IRS also requires corporations, partnerships, and LLCs to have an EIN, even if they have no employees or other need for an EIN.
Most businesses are required to obtain an EIN, and even sole proprietorships and freelancers can benefit from having one. Using an EIN for business helps prevent identity theft and establish credibility for your company. It also creates a definite line between business and personal finances and allows you to hire employees or take out a business loan.
What Is a Tax ID?
A Tax ID is a Taxpayer Identification Number (TIN). It's an umbrella term used for different types of tax identification numbers, such as Social Security Numbers (SSNs), EINs, and Individual Taxpayer Identification Numbers (ITINs).
TINs are used to identify individuals or business entities on all tax returns and filings with the IRS. Employers must require a TIN when hiring employees and independent contractors to verify that the individual is authorized to work in the US and remit withholding taxes on their behalf. A TIN is also used when applying for credit cards and loans with banks or other lenders who use the TIN to assess and report on an individual's credit history.
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3 Fundamental Differences Between EIN and Tax ID
Although EIN and Tax ID are sometimes used in place of each other, there are significant differences between the two terms. Here are 3 ways in which they differ:
EIN and Tax ID are both used to identify individuals or entities to government agencies, banks, and other businesses. However, Tax ID is a general term used to describe various types of tax identification numbers for business entities and individuals. There are several types of Tax IDs: SSN, EIN, ITIN, Adoption Taxpayer Identification Number (ATIN), and Preparer Taxpayer Identification Number (PTIN). Thus, an EIN is a specific type of Tax ID applicable only to business entities.
2. Level of Operation
A Tax ID is used at the federal and state levels for tax and other identifying purposes. Your employer uses your Tax ID to report earnings and state taxes withheld from your wages. Tax IDs are necessary to get a driver's license, apply for unemployment, and file taxes with your state and the federal government.
On the other hand, an EIN obtained through the IRS—sometimes called a FEIN—is used for federal tax filings, bank accounts, and credit applications. States may also issue EIN numbers to business entities that are only used for state income and employment tax filing purposes.
3. Issuing Authority
The Social Security Administration (SSA) and the IRS have the authority to issue Tax IDs. Depending on the type of Tax ID, the issuing authority may differ. An SSN is only available through the SSA, while all other Tax IDs—EINs, ITINs, ATINs, and PTINs—are only issued by the IRS.
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Although both are used to identify an entity, file tax returns, open bank accounts, and apply for credit, Tax ID represents various identification numbers for individuals and business entities, while EIN is a type of Tax ID only issued to business entities.
Since a business must have an EIN to hire employees and individuals must have a Tax ID to be employed, business owners must understand the differences between a Tax ID and EIN to be sure they're used correctly.