An employer identification number also popularly called an EIN works as an identifier you can use for federal tax purposes. The best way is to think of an EIN as a social security number that you can utilize for the business entity.
Many businesses require an EIN, though some may not need it. The businesses that need an EIN want it for various tax-related purposes, and also you may want to have it in case certain events occur in your business. This post explains why you need to get the Federal Employer Identification Number.
Understand what EIN can be used for
If you have a business, then you may need to have an EIN. Businesses that must have the EIN include those with employees, that are operating as a partnership or corporation, and those that are considered to be a limited liability company. Aside from these, you should also consider getting an EIN if you file employment tax returns and withhold taxes on remuneration paid to non-residents.
So whether your organization is a trust, estates, a non-profit organization, farmer’s cooperative, and many others, you need to have an EIN. Even if you don’t need to have an EIN for federal tax reasons, an EIN may still be required for several other situations.
You see, you can use an EIN to open a business bank account and apply for a business license. Also, it’s needed when you want to file an electronic tax return and payment.
Remember that most federal tax payments can be filed electronically utilizing the federal tax filing system, so an EIN can identify your business on all tax returns you make. You may also need to have a state EIN if you decide to file state taxes, but this applies in some states.
Types of businesses that need an EIN
When it comes to a sole proprietorship and there are no employees, then there is no need to have an EIN. This is because you can file the business income tax with your tax return. Instead, you just need to use a social security number to identify your business.
On the other hand, your sole proprietorship may need an EIN if your business changes to a corporation, you may be going through bankruptcy, you have formed a partnership, or your business becomes a multiple-member LLC.
You may also need an EIN if the LLC has to be taxed as a corporation and you purchase or inherit a sole proprietorship business that exists. That said, if you have a qualified joint venture, you may not need an EIN.
This is because a qualified joint venture refers to a specific business run by a husband and wife. So spouses usually don’t need to have an EIN as they are considered to be sole proprietors when it comes to federal tax purposes.
However, it’s a good idea to hold the partnership EIN if you already have a husband and wife partnership in case you may lose the qualified joint venture status.