What Is an EIN and Why Does My Business Need One?

If you're starting a business, chances are you'll need an EIN, or Employee Identification Number, sometimes also referred to as Federal Tax ID number. This nine-digit number is similar to an individual's Social Security Number (SSN), except it only applies to business entities—it's unique to your company and serves various purposes crucial to your business operations. Below, you'll find everything you need to know about obtaining an EIN for your business.

» How does EIN differ from Tax ID? Learn the fundamental differences between the two.

What Is an EIN Used For?

Government agencies use EINs to identify your business for tax and compliance purposes. You'd use your EIN to apply for a business license or permit. Federal and state governments use EINs to track payroll tax remittances and returns.

An EIN can also be used to open a business bank account, apply for a business loan, hire employees, and open credit accounts with vendors or suppliers. Using your EIN for credit transactions such as these will also establish a credit file for your business separate from your personal credit history.

Does My Business Need an EIN?

While most businesses will need an EIN, not all businesses are required to have one. If your business is a corporation or partnership, has employees, or withholds taxes on income, you must have an EIN. A business that doesn't meet these conditions may still need to obtain an EIN if:

• You file returns for Excise or Alcohol, Tobacco, and Firearms taxes
• You have a Keogh plan
• You're involved with trusts, estates, real-estate investments, non-profit organizations, or farmers' cooperatives.

Even if you aren't required to apply for an EIN, you should consider doing so anyway, since using one can distinctly separate your personal and business finances. And, if you're a freelancer or sole proprietor, you can use your EIN on W-9 forms instead of your SSN to prevent identity theft.

» What else does your business need? See the essential documents needed for online payroll processing.

How to Apply for an EIN

You can obtain an EIN through the Internal Revenue Service (IRS) at no cost by submitting an application by mail, fax, phone, or online. Most businesses apply for an EIN online and receive their EIN immediately upon completing the application. However, to apply this way, your business must be located in the United States or U.S. Territories. Only individuals with a valid Taxpayer ID, such as an SSN or Individual Taxpayer Identification Number (ITIN), can apply for an EIN, because the entity must have a responsible party.

Online application will take you through a series of questions about your business, so make sure you have all your information ready before beginning the application. You'll need to answer questions about the structure of your business, including your state of incorporation or the number of LLC members. Other questions pertain to your reason for applying, your primary industry, and the number and type of employees you'll hire over the next year. For tax purposes, you must indicate your fiscal year-end date and tax return filing preferences (quarterly or annually).

» Need help with other online processes, like setting up payroll? Follow our tips for first-time HR managers.

Conclusion

It's almost impossible to operate a business without an EIN—if you choose to skip this step, you won't be able to hire employees, open a business bank account, or obtain financing. Not having and EIN for your business can limit your growth potential and even get you into trouble with the IRS, so make sure you obtain yours for successful business operation.