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Does a Sole Proprietor Need an EIN?

As a sole proprietor, you may not need an EIN, but it still may be beneficial to your business. Find out when an EIN is required, the benefits for a sole proprietor, and how to obtain one.

By Melissa Pedigo • Aug 7, 2022

When starting a new business, getting an Employer Identification Number (EIN) is one of the first steps. It’s free to apply for an EIN, and it’s useful for business identification, getting credit, paperwork filing, and at tax time. 

While some businesses and organizations must have an EIN as a tax requirement, the rules are slightly different for a sole proprietor. 

This guide shares when you need an EIN, its benefits, and how to obtain one for your sole proprietorship.

When a Sole Proprietor Needs an EIN

In a sole proprietorship, you’re the only owner of the business, and it’s not a separate legal or taxable entity.

So, the Internal Revenue Service (IRS) won’t require you to have an EIN for the business. You’ll use your Social Security Number (SSN) to identify your business and your Form 1040 Schedule C, to report your income and expenses.

However, some important cases require an EIN—especially if you:

  • Have one or more employees
  • File excise tax or pension returns
  • Withhold taxes on payments made to non-residents
  • Change your business structure
  • Use a Solo 401(k) or Keogh retirement plan
  • Administer trusts or estates
  • Work with nonprofits, farmers’ cooperatives, or plan administrators 

If your sole proprietorship business doesn’t meet any of the above conditions, you won’t need an EIN. 

Many sole proprietors still prefer to have one because it’s quick, simple, and offers several benefits, which we’ll discuss below.

Benefits of an EIN for a Sole Proprietor

EINs make it easier for you to hire employees, establish business credit, and file tax returns. Plus, you can detach your SSN from your business’s credit profile.  

Here are more reasons ‌you should obtain an EIN for your business:

  • It conveys professionalism: An EIN establishes your sole proprietorship as a professional business—not a side gig. Customers and vendors will be more comfortable doing business with you when they know your business is legitimate.
  • It reduces the chances of identity theft: Using your SSN for your sole proprietorship leaves you vulnerable to identity thieves who can file fraudulent tax returns with it. An EIN identifies your business and minimizes the risk of identity theft.
  • It’s useful when opening a business bank account: A business account helps you easily avoid commingling funds and track business income and expenses. While it’s not mandatory, some banks require sole proprietors to have an EIN before applying for and opening a business account. 
  • It makes it easier to get financing and build a credit history: With a business bank account and EIN, it’s easier and faster to apply for loans, get financing, and establish business credit.
  • It simplifies bookkeeping and accounting: An EIN makes it easier to identify your business income and expenses and organize your books.
  • It makes tax time less stressful: Besides helping you identify and track business transactions, an EIN makes tax time easier and simpler. You can separate personal and business taxes and avoid tax penalties for incorrect or late filings.
  • It simplifies the hiring process: As your business grows, you might need one or more employees. An EIN simplifies the hiring process, allowing you to pay payroll taxes immediately, avoiding late payment penalties.

Over and above these benefits, you can also use an EIN to create a partnership agreement (if you have a business partner) or switch to a limited liability company (LLC) or other business structure as your business grows.

EIN Vs. SSN: What’s the Difference?

EINs and SSNs serve the same purpose: they’re used for identification, to apply for credit, and tax reporting purposes, but they differ in context.

An EIN is a unique nine-digit number from ‌the IRS. It is issued primarily to LLCs, corporations, nonprofits, and other businesses to keep tabs on their business filings.

An SSN is also a nine-digit number provided by the Social Security Administration to a private individual—U.S. citizen, temporary resident, and permanent resident. 

For example, a freelance accountant without employees operates as a sole proprietor and pays small business taxes through a Form 1040 Schedule C tax form. 

The IRS doesn’t require him to have an EIN. So, he can use his SSN for his business until he hires an employee, at which point he must get an EIN to file business tax returns and pay employment taxes.

Can I Use My SSN as My EIN?

You can use your SSN as your EIN to identify your sole proprietorship, but it’s subject to the exceptions we mentioned earlier—having employees, changing business structure, and more.

It’s advisable to get an EIN because it makes it easier to separate personal and business finances, keeping them more secure and organized. And, you won’t need to guard your EIN as closely as your private SSN because it’s already public information.

Getting an EIN for Your Business

It’s simple, fairly straightforward, and free to get an EIN for your business online using the IRS website. Alternatively, you can fill out Form SS-4 and mail or fax it to the IRS. 

Before applying for an EIN, you’ll want to form your business since the IRS will ask for your formation data in the application process. 

And there are some nuances depending on where your business is based:

  • U.S.-based business: Apply online, by phone, fax, or mail. You may also need to obtain a state EIN if your state requires you to pay state income taxes.
  • International business: If you have no principal place of business or legal residence in the U.S. but need to file taxes there, follow the IRS instructions for international applicants to apply for an EIN by telephone, fax, or mail.

Can I Get an EIN Without a DBA?

A DBA or trade name differs from your business’s formal name. It’s like your business’s nickname.

You can get an EIN using your legal/formal business name without getting a separate one for your DBA.

For example, if you’re a sole proprietor named Moe Miller using the DBA “Moe’s Froyo,” you’ll apply and receive an EIN under Moe Miller—your full legal name and business’s formal name.

Establish Your Sole Proprietorship with an EIN

While you’re not required to get an EIN for your sole proprietorship business, you can gain more when you have one.

It’s free, simple to obtain, and it gives you the freedom to scale your business. Plus, you’ll save a step or two in the future when your hands are full, helping your business grow.

Melissa Pedigo, CPA and writer on the Lili Blog

Written by
Melissa Pedigo

Melissa Pedigo has been a CPA for over 20 years. Now a full-time writer with a vast knowledge of U.S. tax and accounting, she’s able to write about tax and finance topics from a unique perspective…as an industry expert.

 

When she’s not writing or being an accounting nerd, you’ll find her watching and playing tennis, reading, tending to her half-grown garden, and studying foreign languages. You can find her on Twitter, Linkedin or at acpawrites.com.

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