When Your New Business Needs an IRS EIN (Tax ID)

As you navigate the initial setup stages of setting up your new business, you'll need to take care of some important tasks, one of which is obtaining an Employer Identification Number (EIN), also known as a Federal Tax Identification Number.

This in-depth guide will explain everything you need to know about EINs, when your business requires one, and how to obtain it easily through the IRS website.

What is an EIN and Why Do I Need One?

Think of an EIN as your business's social security number. It's a unique nine-digit number assigned by the Internal Revenue Service (IRS) that identifies your business for tax purposes. While not mandatory for all businesses, an EIN offers numerous advantages and is often necessary for various situations:

• Filing Federal Tax Returns: If your business has employees, is a partnership, or a corporation (including an LLC electing corporate status), you'll need an EIN to file federal income tax returns.
• Opening a Business Bank Account: Most banks require an EIN to open a business bank account, which is crucial for separating your personal and business finances.
• Hiring Employees: If you plan to have employees, you'll use your EIN to report payroll taxes and withhold income taxes from employee wages.
• Obtaining Business Licenses and Permits: Certain state and local licenses or permits might require an EIN during the application process.
• Building Business Credit: Establishing an EIN allows you to apply for business credit cards and loans, which can help finance your business.

Important: While not always mandatory, having an EIN provides a layer of professionalism and legitimacy to your business. It separates your personal finances from your business transactions, making record-keeping and tax filing more manageable.

EIN Eligibility and Preparation: Before You Apply

Before applying for an EIN, ensure you've completed the necessary state-level business filings to establish your business as a sole proprietorship, LLC, partnership, or corporation. Additionally, determine how you plan to file your federal taxes. Here's what you'll need to have ready for the EIN application process:

• Your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN): This is required for identification purposes.
• Business Legal Name and Address: This should match the information you used during your state business filing.
• Business Mailing Address (if different from legal address): The IRS will send correspondence to this address.
• Number of Members/Owners: Knowing this helps the IRS classify your business entity type.
• Type of Business Entity: Sole proprietorship, LLC, partnership, corporation, etc.
• Reason for Needing an EIN: Select the appropriate reason from the list provided by the IRS.

Tip: Gather all this information beforehand to ensure a smooth and efficient application process.

Obtaining Your EIN: A Step-by-Step Guide on the IRS Website

The IRS offers a user-friendly online application process for obtaining your EIN. Here's a step-by-step guide to navigate you through it:

1. Visit the IRS Website: Head to the IRS website (https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online) and navigate to the section titled "Apply for an Employer Identification Number (EIN) online."
2. Review Eligibility: Before proceeding, ensure your business qualifies for an EIN based on the criteria outlined by the IRS.
3. Start Your Application: Click on the "EIN Assistant" button to begin the online application process.
4. Provide Business Information: Carefully enter the previously gathered information about your business, including legal name, address, business entity type, number of members (if applicable), and reason for needing an EIN.
5. Responsible Party Information: Enter your SSN or ITIN as the responsible party applying on behalf of the business.
6. Review and Submit: Thoroughly review all the information you've entered to ensure accuracy. Once satisfied, submit the application.
7. Receive Your EIN Immediately: Upon successful application, the IRS will instantly issue your EIN and provide you with a confirmation notice that you can download, save, and print for your records.

This entire process can be completed within minutes, making it a quick and straightforward task.

Do-It-Yourself or Seek Help?

Obtaining an EIN through the IRS website is a straightforward process that can be completed independently, making it a cost-effective and convenient option.

• Free and Easy: The IRS application process is entirely free and user-friendly. You can get your EIN within minutes from the comfort of your own computer.

Seeking Help:

The company that assisted you in filing your business paperwork with the state or even your registered agent may also offer this service for a fee. However, since it is a very easy process, you may find it as an opportunity to save money and take the DIY approach.

What if I Need Help?

While the DIY approach is efficient, there might be instances where you need some assistance:

• Tax Filing Uncertainty: If you're unsure about how you plan to structure your business for tax purposes (e.g., sole proprietorship, LLC, S corporation), consulting with an accountant or business attorney can be beneficial. They can help you determine the most suitable structure based on your business needs. The EIN application asks how you intend to file, but it's not a permanent decision. You can always consult a tax professional later to finalize your filing strategy.

Important: Even if you hire a company to file your state business paperwork or use a registered agent service that offers EIN acquisition, they won't decide your tax filing structure for you. Their role is to follow your instructions. They'll ask you how you intend to file and submit that information on the EIN application. Therefore the decision should be made prior to filing for your EIN.  Ultimately, the decision on how to file your taxes rests with you, and consulting with an accountant can provide valuable guidance in this area.

Our Takeaway

Regardless of whether you obtain your EIN yourself or seek help, the process is designed to be simple. In most cases, you'll already have the necessary information after completing your state filings. The key takeaway is that obtaining your EIN is an easy and free task you can accomplish independently, with the option to seek professional guidance on your tax filing structure if needed.

Ultimately, we have found that the DIY route for filing for an EIN is the most beneficial route, considering how straightforward the application is and that paying for someone (other than a lawyer or accountant) to file on our behalf was an unnecessary expense.