Should You Get an Employer Identification Number (EIN)?

If you want to make sure that your business is properly reporting to the IRS, an Employer Identification Number (EIN) can be helpful.

But do you really need one? And if you do, how can you obtain your EIN?

Do You Require an EIN?

As a sole proprietor, you most likely do not need an EIN. However, other types of businesses require EINs. Additionally, the types of activities you engage in can lead to a requirement to apply for an EIN from the government. The IRS helpfully provides a list of questions to help you determine whether or not you need an EIN. If you answer “yes” to any of the following questions, you should obtain an EIN:

• Do you have employees?
• Are you considered a partnership (including LLC) or a corporation?
• Do you file tax returns related to Employment, Excise, Alcohol, or Tobacco and Firearms?
• Do you use a Keogh plan?
• Do you withhold taxes on income, other than wages, paid to a non-resident alien?

The IRS also requires you to apply for an EIN if you are involved with trusts (with a few exceptions), estates, real estate mortgage investment conduits, non-profits, famers' cooperatives, and plan administrators.

In some cases, you might also need an EIN even though you don't meet the IRS list of required business operations. Many banks require you to have an EIN if you want to open a business bank account. Even if you are a sole proprietor, without any employees, you might need to obtain an EIN if you want a separate bank account for your business.

How to Obtain Your EIN

The good news is that applying for your EIN is free. It's a fairly painless process. I applied for one when I changed my business organization from sole proprietorship to LLC, at which point I also opened a business bank account (although I probably should have done it earlier).

The easiest way to apply for your EIN is to turn to the Internet. With the online application, the IRS asks you questions, and you answer them. On top of that, it's possible to validate the information in the same online session, and receive your EIN immediately. You can only receive issuance once per day per responsible part, though (this mostly applies to trusts and estates).

Realize, though, that once you start the online application process, you have to complete it in the same session. If you exit before completing the process, your information will not be saved, and you'll have to start over when you return.

You can also apply for your EIN through the mail, with the help of Form SS-4. This is the method I used, mainly because there was no online option at the time. The form is straightforward, with the requirement to fill in the legal name of the entity, as well as other information, including mailing address and the name and Social Security number of the responsible party. You then indicate what type of organization you have. After answering other questions about employees, and when you close your accounting year, among other questions, you can send your form in. It's fillable on the IRS web site, so you can do it on the computer, and then print it out.

You can also apply over the phone, or send your Form SS-4 in via fax.

Getting an EIN can smooth the way on a number of levels, no matter your business.