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An employer identification number (EIN), or business tax ID, is a unique nine-digit number that you use when filing taxes for your business. An EIN also helps you register a business entity, obtain a business loan, open a business bank account, and much more. An EIN is as important for your company as a social security number (SSN) is in your personal life.
For some businesses, an EIN is a tax requirement. You have to get one—there’s just no way around it. Getting an EIN is optional for other businesses, but there’s good reason to get one anyway. In fact, there are some distinct advantages you stand to gain by applying for an EIN. And the good news is that applying for an EIN is free and takes just minutes, so you won’t be wasting precious resources by getting one.
Learn when an EIN is required and when it’s optional, how to get one, and the primary benefits of getting an EIN. You’ll see that this is one easy way for your business to get ahead.
Many people associate EINs with big corporations, but even a freelancer or the owner of a very small business might need an EIN to file business taxes and for other purposes. If you do need a business tax ID, the best practice is to get one as soon as you open your business, as part of your business launch checklist.
The following types of businesses must get an EIN for tax purposes:
For further assistance determining if you need an EIN, check out the IRS’s questionnaire.
Unless you meet any of the descriptors above, you most likely don’t need an EIN. That means millions of sole proprietors, including freelancers, technically don’t need an EIN. But there are plenty of reasons to get one anyway!
You should consider getting an EIN even if you’re not required to get one. Generally speaking, having an EIN helps you separate your personal finances and personal life from your business. And that’s important to simplify accounting and bookkeeping, and to limit liability in the case of a lawsuit. Often, foregoing an EIN now can cost you time and money down the line.
Even if you’re not required to get an EIN, the benefits of getting an EIN include the following:
As we just mentioned, certain kinds of businesses must get an EIN to file taxes. So what happens if you’re required to get an EIN but fail to do so? One pointer is to do your research early and figure out if you need an EIN well in advance of tax time. Don’t wait until tax day nears because depending on your method of application, the IRS can take up to five weeks to assign you an EIN.
If you don’t have your EIN by tax day, and were supposed to get one, you have to fill out specific paperwork to notify the IRS. If you forget to do that, the IRS might not accept your filing, and you could face penalties for a late return.
Plus, for certain types of tax deductions, such as home office deductions for business, your chances of an IRS audit decrease if you have an EIN.
“If the business owner has any desire to get tax benefits from owning and running a business in-house, such as wanting to deduct a room as an office, then having an EIN will help them make that case better and more effectively,” says attorney Janet Gershen-Siegel. “Personal office deductions have a tendency to bring on IRS audits. Why not make your case before you have to?”
You might be surprised to learn that getting an EIN is an effective way to prevent identity theft. An EIN separates your personal finances from business finances. Once you have an EIN, you don’t have to provide your personal SSN to clients or vendors who you do business with. Instead, you can provide your EIN.
Providing your EIN means you can keep your SSN more private, lowering the chances of a thief stealing your SSN and getting access to your hard-earned profits. Thieves do steal EINs as well, but the problem isn’t as widespread as consumer identity theft—at least so far.
According to the Treasury Inspector General, 285,670 EINs were stolen or falsely obtained during tax year 2011 (the most recent year for which there’s reliable data) to file fraudulent business tax returns. Still, the IRS doesn’t view EIN identity theft as a huge concern compared to stolen SSNs, which can affect millions of consumers. Your chances of identity theft are higher if you regularly use your SSN to transact business instead of an EIN.
For freelancers and independent contractors, losing even one client can make a big financial difference. You want to do everything you can to cement your status as a legitimate business owner. When you take on a client, you’ll have to provide either an SSN or EIN to them, so they can furnish you a 1099 tax form.
Having an EIN adds more credibility and signifies that you have a serious business, as opposed to something you’re just doing as a side gig. According to attorney Gershen-Siegel, “Occasionally selling stuff or providing a service, and doing so without an EIN, can give a business owner a feeling that what they’re doing isn’t really a business, per se. That they can quit at any time, no big deal. It’s a way to kind of not ‘go all in.’ But with an EIN, you’ve told the IRS (and, effectively, the world) that you’ve got a business and not a hobby.”
In addition, having a business tax ID proves that you’re an independent contractor, rather than an employee, and that’s attractive to companies who’d want to hire you. Companies conserve money and minimize legal responsibilities by hiring independent contractors, so any evidence in support of your status as an independent contractor can help you attract clients.
You can speed up the process of applying for a business loan if you have an EIN. Most lenders don’t explicitly require an EIN. As long you have any necessary business permits or licenses and are legally qualified to do business, you can apply for the loan.
The catch is that many lenders require applicants to have a business bank account with a certain number of deposits. This is to ensure that you have a place to receive the loan funds and make periodic loan payments. To get a business bank account, you often need an EIN.
In addition, some lenders, including SBA lenders, check business credit when evaluating your loan application. Having an EIN helps you build business credit, without which you might not be eligible for the loan (more on this later).
As we just mentioned, having an EIN comes in handy when opening a business bank account. Some banks allow sole proprietors to open a business bank account without an EIN, but others have stricter policies. Bank of America checking and savings accounts, for instance, require proof of EIN from sole proprietors and all other types of businesses.
Along with your EIN, you’ll need to provide a few other documents to open a business checking or savings account. These include your business’s formation date, business location, legal business name, and personal information about the owner. And once you open a business bank account, make sure the only money going into or out of the account is for business purposes.
As a small business owner, it’s not possible to do everything by yourself to build up your company. You often have to rely on vendors, suppliers, and synergies with other businesses to achieve your goals. And having an EIN makes such third parties more likely to work with you.
These parties might want to check your business credit before signing up to work with you. Wholesale distributors often require an EIN check before they’ll do business with a retailer. Having an EIN shows that you have a credible business and are a responsible person who will pay the vendor on time.
An EIN is key to establishing a business credit history. Business credit history is similar to your personal credit history. But instead of measuring your personal financial habits, business credit evaluates your company’s history of bill payment and financial responsibility.
Your business has a commercial credit report. Similar to what’s contained in a consumer credit report, a commercial or business credit report contains a summary of your business’s credit accounts and payment history. Loans, business credit card activity, and payments to vendors and suppliers show up on your business credit report.
Anytime you apply for credit by providing your EIN, that account will show up on your business credit report. If you’re on time with that account, your business credit score will see a boost, which can help you qualify for good rates on business loans and favorable terms from suppliers.
If you have employees or are on the verge of hiring employees, then you absolutely need an EIN. But even if you have no immediate plans to hire employees, getting an EIN is a good idea if you think you might at some point in the future. That can be difficult to predict, but if you plan to scale your business to the point where you might need an extra set of hands, getting an EIN doesn’t hurt. An EIN lets you set up a payroll system as soon as you hire your first employee, without any delays in the hiring process.
Having an EIN can be particularly helpful for starting a business if you’re a non-U.S. citizen without a social security number. Foreign nationals can apply for an EIN by contacting the IRS. With an EIN in hand, you might be able to apply for a business credit card or open a business bank account before you get an SSN. This gives you some headway in launching your business and might even give you a competitive advantage if you need to move quickly.
Now that you know all the benefits of an EIN, you might be wondering what your next steps are for getting one. The good news is that it’s absolutely free to get an EIN on the IRS’s website. You can apply online or by mail, fax, or, for foreign applicants, phone.
Applying online is the easiest method and takes just a few minutes. The person applying for the EIN must be an owner, principal, or officer of the business (or you can sign a release to have a third party apply on your behalf). Before you apply, make sure the applicant has their own personal SSN, the business’s address, and founding date available. If you apply online, you’ll receive your EIN instantly.
Be wary of services or websites that charge you for an EIN. This could be a scam. Getting an EIN through the IRS is free and easy.
Once you obtain your EIN from the IRS, it’s effective immediately. You can start using it right away to apply for loans, open a bank account, or to provide to a vendor. In most cases, your EIN will remain with you throughout the course of your business.
However, if the structure or ownership of your business changes, then you’ll need a new EIN. For instance, if you have a sole proprietorship but later decide to incorporate, you’ll need a new EIN. Similarly, if you decide to bring a partner on board, you’ll need a new EIN to reflect that change. However, smaller changes, such as changing your business name or adding a new business location, don’t require a new EIN.
And if you ever lose or misplace your EIN number, don’t worry. Looking up your business tax ID number is pretty simple. You can locate your EIN on old tax papers or contact the IRS for assistance.
An EIN isn’t a tax or legal requirement for every business, but even so, there are several advantages to applying for one. An EIN gives you flexibility as you add employees, take on clients, or otherwise grow your business. Administratively, an EIN makes it easy to apply for a loan or open a business bank account. And perhaps one of the most compelling reasons to get an EIN is to protect your business from the perils of identity theft.
The good news is that an EIN is easy and free to get. So, don’t let this simple opportunity to get a competitive advantage slip through your fingers!