Many entrepreneurs often associate the need to obtain an employer identification number (EIN) with hiring employees. This is correct. It is a requirement to obtain an EIN if a business plans to hire, and pay, employees.

An EIN is a nine-digit number issued by the IRS when you incorporate or form an LLC for your business. It identifies and tracks employer tax accounts. By obtaining this tax ID, the IRS tracks your business activity and make sure it collects payroll tax to remain in compliance.

What if your business does not plan to hire employees in the near future? Is it still necessary to obtain this tax ID? The answer is yes. Obtaining an EIN provides many benefits for businesses that go beyond hiring employees. Let’s look at a few common benefits and what you need to know about the EIN application process.

 

1. Ability to identify your business.

Earlier, I mentioned that an EIN is a unique nine-digit number that identifies small businesses. Another popular, unique nine-digit number that identifies businesses and their owners is a social security number (SSN).

Entrepreneurs are legally required to identify their small business using one of these federal tax IDs. If you have incorporated or formed an LLC, you have the choice to use either your SSN or EIN as a business identifier.

Once you obtain an EIN, you may use it instead of your SSN to identify your business. Quite a few entrepreneurs make the decision to fill out paperwork with their EIN. This is because an EIN is much less sensitive than an SSN. Since an EIN helps to act as a safeguard, many entrepreneurs will use this tax ID when paying federal taxes or filling out payroll reports for extra peace of mind.

Pro tip: your EIN may be a safeguard, but it still needs protection. Use this ID in situations as needed by your business. Keep the ID in a safe place, much like you would protect an SSN.

 

2. Use an EIN to open a business bank account and establish business credit.

Businesses that obtain this tax ID can open a business bank account and establish business credit.

Your small business needs a separate bank account. This ensures personal and professional finances do not co-mingle together. Most financial institutions also require reviewing a certified copy of an EIN before opening a business bank account.

How about business credit? A business credit profile is separate from that of a business owner. Using an EIN to open a business bank account means that you’ll be able to establish a business credit profile and build business credit.

 

3. Establish pension, profit sharing, and retirement plans.

Businesses that plan to hire employees may also have plans to create certain employee benefit plans. Some of these may include pension, profit sharing, and retirement plans.

If you want to establish one — or all — of these plans for employees, you are considered a plan administrator. It is a requirement to obtain an EIN before establishing these plans.

 

4. There’s no expiration date.

Small business owners often need to renew certain documents, like annual reports or business licenses.

However, an EIN is the exception to the rule. Once this number is issued by the IRS, it does not expire or require a renewal. This allows you to keep, and use, an EIN forever.

 

How Do I File For an EIN?

You know you want to file for and obtain an EIN. However, it’s critical to know if your business is eligible for this tax ID before filing an application.

The eligibility requirements for an EIN filing are pretty straightforward. The principal place of business must be in the United States or U.S. territories. The principal officer must possess a valid tax ID, which may be an SSN, EIN, or an individual taxpayer identification number (ITIN). Finally, remember that the business must be legally formed as a business formation. You may need to complete filing paperwork to incorporate or form an LLC if you are still a sole proprietor or an unincorporated entity.

After determining your eligibility, you may begin the filing process. Complete and submit Form SS-4, Application for Employer Identification Number with the IRS. You may also work with a third-party filing service for extra assistance from trusted professionals. If you have any questions about obtaining an EIN, don’t hesitate to conduct your due diligence. Reach out to a trusted legal or accounting professional to answer any questions you may have about the process.

 

 

Source