A federal tax ID or taxpayer ID is a number used to identify individuals, businesses, and other legal entities for tax purposes pursuant to the Internal Revenue Code (IRC) and specific tax laws that affect different types of legal entities.
The most common type of tax ID is a Social Security Number (SSN), followed by what’s called an Employer Identification Number or EIN. If you’re planning to start a business, the latter of these two types of federal tax IDs will be relevant to you and your business.
Does Your Business Need a Tax ID?
EINs are required for most types of business entities, including partnerships and corporations, and for any business owner that has employees and needs to establish a payroll.
Federal tax IDs, including EINs, are furnished by the Internal Revenue Service (IRS) and are unique to the legal entities they identify. The IRS will use this number to identify and track any tax responsibilities the legal entity may have.
In addition to identifying your business’ tax obligations, EINs are necessary for other business objectives, including opening accounts and applying for credit in the name of the company; some states may require businesses to obtain an EIN for various permits or licenses depending on the type of business you establish and its intended business activities.
There are actually three types of federal tax IDs, and each has its own purpose and is intended for particular people and companies. The bottom line is that these IDs are meant to be identification that a business uses for all business and tax matters. Read on to get a rundown of all of them.
Social Security Number
This nine-digit number is assigned to every U.S. citizen, and in the world of business, it can also be an identification number for a company. This is the case with businesses classified as sole proprietorships, as well as those registered as single-owner limited liability companies (LLCs). In these cases, a single person is the 100 percent owner of the business, responsible for all of its payments, debts, loans and taxes, as well as the only recipient of its profits. Hence, this owner uses his or her own social security number as a federal tax ID.
Employer Identification Number (EIN)
An EIN is a federal tax ID number used by businesses of all sorts who either have employees or more than one owner. It also applies to trusts and estates. This number is the single identification number of every business.
Individual Taxpayer Identification Number (ITIN)
This nine-digit number is a federal tax identifier for most resident and non-resident aliens who cannot get a social security number, as well as their spouses and dependents.
And Still Others
There are two other types of federal identification numbers, though used by much smaller numbers of individuals. They include paid tax preparer identification numbers (PTINs) and adoption taxpayer identification numbers (ATINs).
Ultimately, no matter who you are or what the makeup of your business, you must have a federal tax ID. Making sure you have the right one is the right thing to do for your business and will bring the most benefit to your business life.
Filing for a federal tax ID number or EIN is simple. Online applications are the fastest way to obtain an EIN; an application for a federal tax ID or EIN is typically processed within 24 hours, and you can check the status of your tax ID at any time.