At the start of your self-employment journey, the amount of business- and tax-related terms to learn can be a bit daunting. One such term you might have heard of without really understanding is an employer identification number (EIN). But what exactly is an EIN, and do you need one for your business or freelance work?
An EIN is used to identify a business for tax purposes, much like a social security number is used to identify an individual. Also like a social security number, it has nine digits.
Many small businesses are required to get an EIN, but there are a couple of exceptions. So let’s take a look at whether you need one for your business, and how to go about getting it.
Do I Need an EIN?
If your business has employees or is a multi-member LLC, corporation, or partnership, you are required to get an EIN, as long as you meet the following criteria:
- Your business must be located (or perform its main business activities) within the U.S. or U.S. Territories.
- You must have a valid taxpayer identification number, such as a social security number.
If you are a sole proprietor or single-member LLC with no employees, you are not required to operate with an EIN, unless you meet certain conditions such as being part of a trust or estate. However, you can still apply for an EIN and use it instead of your social security number for your tax forms if you choose. Doing so can help protect your privacy, since you won’t have to give out your social security number to clients. Using an EIN instead of your social security number can afford your business more credibility in prospective clients’ eyes (of course, simply not having an EIN does not make you any less of a professional!).
An EIN can also make it easier for you to separate your business and personal finances. In fact, banks may require an EIN in order to open an account for your business.
How Do I Get an EIN?
Applying for an EIN is completely free and very simple. You can apply online via the IRS website (the quickest and easiest way), by mail or fax, or by phone if you’re applying from outside the U.S.
Before you apply, make sure you have all the information you need on hand, otherwise, you could end up with delays or having to start the application over from the beginning. Note that if you apply online, you will not be able to save your application and return to it later — you must fill it out in one sitting, and the application will reset if you are inactive for more than 15 minutes.
While you do not have to be the business owner in order to apply, you do have to be a responsible party, which the IRS identifies as someone who has a level of control over the business’s finances.
Once you’ve applied and your information is validated, you’ll receive your EIN and be good to go! Bear in mind that if you apply online, you’ll receive your EIN immediately, while other methods will take a few days.
More information on the application process can be found on the IRS website.
What Can I Use My EIN For?
While an EIN is primarily used for tax purposes, it also has a number of other uses, including when applying for a business license, hiring employees, invoicing and opening a bank account for your business. And, as mentioned above, sole proprietors and single-member LLCs can use an EIN instead of their social security number to protect themselves against identity theft.
Even if you aren’t required to get an EIN, the more you do to separate your personal and business finances, the more you’ll be empowered to identify as the professional business owner you are.