Understanding EIN Numbers: Common Pitfalls & Everything You Need to Know – EIN Filing & Business Success

Success with Business Formation & EIN Filing: When starting a business, one of the first steps is obtaining an Employer Identification Number (EIN). This unique identifier is essential for activities like opening a bank account, hiring employees, and filing taxes. In this guide, we’ll cover what an EIN is, who needs one, common mistakes to avoid, and the benefits of having an EIN.

What is the Purpose of Having an EIN Number? EIN Filing & Business Success

An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is a unique nine-digit number assigned by the IRS to identify a business entity. The primary purpose of an EIN is to enable the IRS to track the tax obligations of businesses. Here’s how an EIN is typically used:

• Filing Taxes: Businesses use their EIN to file tax returns and pay federal taxes. It’s essentially the business’s version of a Social Security Number (SSN).
• Hiring Employees: If you plan to hire employees, you must have an EIN. This number is used for payroll taxes and reporting employee wages to the IRS.
• Opening Business Bank Accounts: Most banks require an EIN to open a business bank account. This helps separate personal and business finances, which is crucial for legal and tax purposes.
• Applying for Business Licenses: Many states and local governments require an EIN to issue business licenses or permits.

Is an EIN the Same as a Tax ID? EIN Filing & Business Success

Yes, an EIN is a type of Tax Identification Number (TIN). The term “Tax ID” is a broader category that includes several types of identification numbers used for tax purposes:

• Social Security Number (SSN): Used by individuals.
• Employer Identification Number (EIN): Used by businesses.
• Individual Taxpayer Identification Number (ITIN): Used by individuals who are not eligible for an SSN.

While all EINs are Tax IDs, not all Tax IDs are EINs.

Who Qualifies for an EIN Number?

An EIN is required or recommended for a wide range of entities, including:

• Sole Proprietors: Even though sole proprietors can use their SSN for tax purposes, obtaining an EIN is often beneficial for separating personal and business activities.
• LLCs: Limited Liability Companies (LLCs) need an EIN, especially if they have employees or elect to be taxed as a corporation.
• Corporations and Partnerships: All corporations and partnerships must have an EIN.
• Non-Profit Organizations: Non-profits require an EIN for tax-exempt status and other administrative functions.
• Trusts and Estates: If a trust or estate has income that requires it to file a tax return, it needs an EIN.

Is an EIN the Same as an SSN?

No, an EIN is not the same as an SSN. An SSN (Social Security Number) is issued to individuals for personal identification and tax purposes, whereas an EIN is issued to businesses and other entities. The primary difference is that an SSN is tied to an individual, while an EIN is tied to a business entity.

Common EIN Mistakes and How to Avoid Them – Success with Business Formation & EIN Filing

Obtaining an EIN is generally straightforward, but there are some common mistakes to avoid:

1. Incorrectly Filing for an EIN When Married

If you’re married and filing jointly but plan to start an LLC, it’s crucial to apply for the EIN correctly. A common pitfall is applying for an EIN as a partnership rather than a single-member LLC. This can happen if both spouses are listed as owners, inadvertently creating a partnership instead of a single-member LLC. The IRS will treat the business differently for tax purposes, potentially complicating your tax filings.

Solution: If you intend to form a single-member LLC (even if both spouses are involved), ensure only one spouse is listed as the owner when applying for the EIN.

2. Losing or Misplacing Your EIN

It’s essential to keep your EIN secure, as you’ll need it for various business activities. However, if you lose or misplace your EIN, it can be retrieved.

Solution: You can find your EIN on your previous tax returns, bank statements, or by contacting the IRS directly at their Business & Specialty Tax Line. Always keep a record of your EIN in a secure location.

3. Using an Incorrect EIN

If you mistakenly use the wrong EIN or need to correct an EIN application, you’ll need to take corrective action with the IRS.

Solution: Contact the IRS to correct the EIN. It may involve filing an amended return or submitting additional documentation. Ensure all future filings and documents reflect the correct EIN.

How Much Does an EIN Cost?

An EIN is completely free when obtained directly through the IRS. There are no fees for applying for an EIN, whether you apply online, by fax, or by mail. However, beware of third-party services that charge fees for obtaining an EIN on your behalf. These services typically offer convenience but at a cost that is unnecessary for most applicants.

Can I Get an EIN on My Own?

Yes, you can easily apply for an EIN on your own through the IRS website. The application process is straightforward and takes only a few minutes to complete online. You can also apply by mail or fax if you prefer. Once the application is submitted, you will typically receive your EIN immediately if you apply online, or within four weeks if applying by mail.

How Long Does It Take to Get an EIN Number Online?

When you apply for an EIN online through the IRS website, you will receive your EIN immediately upon completion of the application. This is the fastest method to obtain an EIN. Applying by fax typically takes four business days, while applying by mail can take up to four weeks.

What Can I Do with My EIN Number?

Your EIN is a versatile tool that you’ll use for various business-related tasks:

• Open a Business Bank Account: Most banks require an EIN to open a business checking or savings account.
• Apply for Business Credit: Use your EIN to establish business credit separate from your personal credit.
• File Business Taxes: You’ll use your EIN when filing federal and state tax returns.
• Hire Employees: An EIN is required to report employee wages and withhold payroll taxes.
• Apply for Business Licenses and Permits: Many local governments require an EIN to issue business licenses or permits.

How Do I Make Money With My EIN?

While your EIN itself doesn’t generate income, it’s a crucial part of your business’s identity and operations, enabling you to:

• Build Business Credit: With an EIN, you can apply for business credit cards and loans, which can help you finance and grow your business.
• Expand Operations: An EIN allows you to hire employees, apply for business licenses, and take other steps that can lead to increased revenue.
• Separate Personal and Business Finances: Using an EIN to open business accounts helps keep your business finances organized, which can lead to better financial management and profitability.

What Happens If I Get an EIN and Never Use It?

If you obtain an EIN but never use it, there are no immediate consequences. However, if the IRS sees no activity (such as tax filings or payments) associated with the EIN over several years, they may deactivate it. It’s important to note that if you’ve used the EIN at any point, you should file a final tax return or formally close the business to avoid any future tax liabilities.

What Do I Need to Put Under My EIN?

Under your EIN, you’ll need to report all income, expenses, and tax obligations associated with your business. This includes:

• Filing Tax Returns: Use your EIN to file federal, state, and local tax returns.
• Employee Wages: Report employee wages and withhold payroll taxes under your EIN.
• Business Income: All income generated by your business should be reported using your EIN.

Can I Buy a Car with My EIN?

Yes, you can buy a car using your EIN, but it will be considered a business purchase. This means:

• Business Use: The car should primarily be used for business purposes. Personal use may result in taxable income or limited deductions.
• Financing: You can finance a car under your business name using your EIN, which can help build business credit.

Conclusion: The Importance of an EIN in Business Operations – EIN Filing & Business Success

An Employer Identification Number is a vital component of any business, providing a unique identifier for tax reporting and other essential activities. Whether you’re starting a new business, hiring employees, or managing your tax obligations, having an EIN is critical. Understanding how to obtain, use, and manage your EIN will help ensure your business operates smoothly and remains compliant with IRS regulations.

If you need assistance with applying for an EIN or managing your business’s tax obligations, contact Molen & Associates today. Our team of experts is here to help you navigate the complexities of business ownership and ensure your business is set up for success.