If you own your own business or are looking to start a small business the IRS may require you to obtain a business tax number known as an Employer Identification Number or EIN. This number is like your businesses social security number in that each is unique for every business.
While these are generally associated with LLCs, LLPs, and other types of incorporation, even sole proprietors are required to get an EIN in some cases. As a sole proprietor, you will be required to obtain an EIN if you:
- Hire employees
- Have a 401k retirement plan
- Buy or inherit an existing sole proprietor business
- Incorporate into another business structure
- File for bankruptcy
Benefits of a Business Tax Number
Even if you don’t think you will need a Business Tax Number or Tax ID number it’s a good idea to get one as many banks may require it to open a business account. Additionally, these numbers help with:
- Identity theft – As an independent contractor you are required to provide your social security number or tax number to your clients. Otherwise, they are required to hold 28% of your payments
- Establish independent contractor status – By gaining and filing with a business tax number you are able to show clients you are not an employee and identify yourself as an independent contractor
Business Tax Number Related Terms
You may see a lot of terms being associated with business tax numbers. The tax number you need will ultimately depend on the type of business you have and who you are as a business owner. Here we’ll break down some of the more common terms you’ll see:
SSN – The Social Security Number, used by US residents who manage a business formed as a sole proprietorship
ITIN – Individual Taxpayer Identification Number. This is required for non-US residents who cannot get a SSN. Learn everything you need about the ITIN and how to get one.
EIN – Legally formed businesses such as Corporations and LLCs have an Employer Identification Number or EIN. This unique 9-digit number is essentially a business’s social security number.
Applying For an EIN
In order to apply for a business tax number, you’ll need to submit an application with the IRS. You can find more information and the forms to fill in directly on their website here.
When you apply for a business tax number you can expect to go through the following steps:
Step 1 – Determine whether you need an EIN
If the business employs workers, withholds taxes on everything from wages to salaries, or the business is being operated as a corporation or partnership, you’ll need to acquire an EIN. You’d also need an EIN for estates, trusts, and non-profit companies. As noted before, if you’re a sole proprietor it’s advisable to get an EIN, but it’s mandatory to have one if you have any people working for you.
Step 2 – Apply for an EIN
Besides applying online, business owners can apply by fax, phone or mail. However, the benefit of applying online is you can receive your EIN after answering a few questions.
Step 3 – Answer five short questions
The first question you’ll need to answer is what type of business structure that you’re using (corporation, LLC, partnership, estate or sole proprietorship). Next, you’ll need to choose from the available options that most accurately describes your reasons for applying for a business tax number. This can range from forming a new business to needing business bank accounts, to a host of reasons. You will also be required to provide your name and social security number for the questionnaire.
Step 4 – Save the document with your EIN
At the end of the questionnaire you’ll be given a new EIN for use immediately. At the same time you’ll get an official IRS document that confirms the successful completion of the application. Keeping a copy of your records is a good idea in case you ever misplace it or need it for reference.
Besides an EIN, what other IRS requirements do I need to start a business?
When you go to acquire a taxpayer identification number for your business there are some important steps to consider.
- Select a business structure
If you haven’t done so before, you will need to choose a business structure. You can pick from sole proprietorship, corporation, or limited liability corporations or partnerships. Regardless of which you choose, you’ll need that structure for your EIN questionnaire. Here you can find out more information on the types of businesses.
- Choose a tax year
It may not be obvious, but you need to choose how your taxable reporting year will work. The reporting year will be based on an annual accounting period and can be a calendar year or a fiscal year. Fiscal years work by simply choosing a different starting month other than January to report your taxes. If you aren’t in business for a full year or change your business structure you may be subject to a short tax year, which is essentially a truncated reporting period.
- If you have employees have them fill out Form I-9 and Form W-4
- Pay your business taxes
Though it may seem obvious, you need to consider and pay all of the taxes associated with your business. Federal income taxes are paid as you go, where you pay your taxes throughout the year through withholdings. If you’re not sure how much to withhold from your paychecks you can check out this information provided by the IRS. Additionally, you need to consider self-employment taxes if you work for yourself, or employment taxes for your employees if you have any. Lastly, you may be subject to excise taxes if:
- Make or sell particular products
- Run a particular type of business
- Utilize certain types of equipment, facilities or products
- Take payment for particular types of services
You can find out more information on business taxes on the IRS website.
What other requirements are there?
Starting or registering a business can be a rather complex process. If you need someone to help walk you through all the applicable steps you should talk to the financial specialists at Camino Financial. They will help you work through the individual needs for your business such as a Tax number. However, there are other considerations they can help you with.
- Registered Business name
When you register the name for your business you’ll do a “Doing Business As” (DBA) or “Fictitious Business Name” (FBA) that lets the government know the name you’ll be running your business under. This can be different or the same as the legal business name. Keep in mind this won’t provide you with any trademark protection.
- Federal Taxes
As we’ve discussed in this article, you’ll need a taxpayer identification number in order to file and pay federal taxes. And in order to receive an EIN you’ll need to choose a business structure.
- State & Local Taxes
Beyond federal taxes, many businesses are subject to both state and local taxes including, but not limited to self-employment, payroll, income, sales, and property. Each state, county, and municipality may be different. If you have employees you’ll be subject to state unemployment taxes as well.
- Business Permits & Licenses
Whether you are an individual contractor or have employees you’ll need to obtain all the relevant business permits and licenses. For example, if you run a restaurant you may need a liquor license. If you’re a practicing accountant you’ll need a CPA (Certified Public Accountant) designation. What permits and licenses you’ll need will depend on what, how and where you do your business.
- Business Laws & Regulations
It’s extremely important to understand the laws and rules that govern your business activities. Even car shop owners need to understand how and where they can dispose of everything from oil to batteries. Financial specialists and consultants can help you navigate the legal minefield to understand what applies to your situation.
It’s no easy task to start and run a small business, and it’s extremely important that you comply with the IRS and all government rules and regulations. With so many hurdles to overcome you may get lost before you even get started. That’s why it’s important to work with people who know and understand how the whole process works.
Camino Financial works with small business owners and helps them obtain the financing necessary to grow and expand their businesses. Their broad experience can help you through all the steps of obtaining a business loan that is tailored to your individual needs and goals. If you aren’t sure where to start, contact Camino Financial today to help get you going. And don’t forget to subscribe to the Camino Financial newsletter to stay on top of trends, educational tools, and small business resources!