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Why You Need an Employer Identification Number

There are many essential tasks to complete if you are thinking of forming a new business. An important but often overlooked step is obtaining an Employer Identification Number (EIN). An EIN is a nine-digit federal tax identification number obtained from the Internal Revenue Service (IRS). It uniquely identifies a business entity and serves many purposes for a new company. The primary reasons why business owners might need an EIN include protecting individual Social Security numbers from identity theft, opening new business accounts, and hiring new employees.

1. Privacy. EINs are often described as Social Security numbers for businesses. Owners of sole proprietorships who want to avoid using their Social Security number for business purposes may obtain an EIN. A company’s EIN is not confidential. Consequently, you should take steps to keep your EIN secure during your transactions.

2. Contracting and employment. EINs are also beneficial to employers and independent contractors. For employers, an EIN is needed to set up a payroll system. As a contractor, having an EIN further distinguishes you as a business owner rather than an employee. Your EIN will likely be used to complete the necessary 1099 form.

3. Banking and credit. You may also need to obtain an EIN if you are opening a new business account, as most new businesses do. Banks typically require an EIN to open a new business account because they recognize the EIN as the business entity’s unique identification number. You may use your Social Security number instead if you are operating as a sole proprietorship. However, it is advisable to obtain an EIN to limit the potential exposure of your Social Security number. Your EIN can also be used to apply for credit. By using your EIN, you restrict the impact to your business credit report and therefore protect your personal credit score.

4. Taxes. Certain entities are required to have an EIN for filing taxes: corporations, general partnerships, limited partnerships, multimember limited liability companies, and entities that have elected Subchapter S taxation. Your EIN will identify your tax report for the IRS. If you own an entity that is required to have an EIN and do not obtain one in time, it may delay your tax processing and result in avoidable penalties, so it is crucial to obtain your EIN sooner rather than later.

How to Obtain Your EIN

Obtaining an EIN is free and can be done in several ways. Most people opt to apply online; however, you can also apply via mail or fax. If you opt to apply via mail or fax, you must use Form SS-4. The application consists of questions regarding the business entity and the individual who will serve as the responsible party. The IRS has indicated that the responsible party should be someone who controls, manages, or directs the entity in question. This is usually a principal owner or officer. There are also a few questions about the type of business applying and the business’s plans to hire employees. After the application is completed and submitted, a unique EIN is assigned to the applicant.

Next Steps

If you have recently formed a business, are in the process of opening a new business account, or are starting to hire employees, our attorneys are available to help you obtain your EIN and complete any of the other critical tasks that may arise when starting up a new business. You can call our office to schedule a virtual consultation to discuss your business planning needs. We are here for you.


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