Business Federal Tax ID Number: 5 Questions You Should Answer First
Starting a business involves a great deal of commitment, planning, research, and making key financial decisions.
One key choice concerns what type of business entity you want to establish. Your entity selection not only determines which form you will need to file for income tax returns but also dictates whether you will be able to create a separate credit profile that’s unique only to your business.
The number used to identify your business entity by the IRS is called an Employer Identification Number (EIN) also known as a Federal Tax Identification Number. The IRS uses this number to identify taxpayers that are required to file various business tax returns.
The EIN can be viewed as the corporate equivalent to a Social Security Number (SSN). The major difference is that while each individual is a single SSN, business owners can obtain multiple Business Federal Tax ID numbers if they own own multiple companies.
Sole proprietors, on the other hand, use their Social Security Number (SSN) for the purpose of reporting taxes and do not apply for a Federal Tax ID Number. In many ways, a sole proprietorship is the easiest business structure because it doesn’t require state paperwork or separate tax filing-but it does have some serious drawbacks.
First of all, there is no separation between your personal assets and that of your business. So if your business defaults on its financial obligations, your personal assets can be used to satisfy your company’s debts and liabilities.
Second, without a Federal Tax ID Number your business cannot create a credit file with the major business credit bureaus (such as Dun and Bradstreet). As a result, your personal credit will be a key factor that creditors and lenders will use to determine the creditworthiness of your business. And keep in mind as a sole proprietor you will need to file a DBA (Doing Business As) announcement…if you don’t your personal name will be your company name.
A sole proprietorship is also called a Schedule C business, because when you file your personal 1040 tax returns the income and expenses for your business are reported on a Schedule C that’s attached to it.
To make your decision easier, if you can answer “Yes” to any of the following five questions, then you will need to apply for a Business Federal Tax ID Number:
1) Do you have employees?
2) Does your business operate as a corporation or a partnership?
3) Do you file any of the following tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
4) Do you withhold taxes on income, other than wages, paid to a non-resident alien?
5) Do you have a Keogh plan?
Also, if you are involved with any of these six types of organizations, you will need to apply for a Business Federal Tax ID Number:
1) Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
2) Estates
3) Real estate mortgage investment conduits
4) Non-profit organizations
5) Farmers’ cooperatives
6) Plan administrators
You can apply for an EIN several different ways, with no cost whatsoever. For the fastest and most convenient method consider using the online interview-style application provided by the IRS. Once you complete the application you will receive your EIN immediately.
For more information, review the Understanding Your EIN document and watch the Virtual Small Business Tax Workshop located at the IRS.gov website. These resources will provide what you need to know about federal taxes and your new business.