Do I Need a Federal Tax ID?

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A tax ID, also called an Employer Identification Number or EIN, is necessary for most types of business entities, and is used by the Internal Revenue Service (IRS) to track tax responsibilities outlined in the Internal Revenue Code (IRC).

Businesses are taxed based on the type of formation they register with the state or federal agency. Common business types include sole proprietorships, partnerships, corporations, and limited liability companies (LLC).

In most cases, a business entity is required to apply for a federal tax ID. For example, you will not need to apply for a federal tax ID if:

In both of these cases, the sole proprietor or single member of an LLC may choose to use a Social Security Number (SSN) to identify the business for tax purposes.

There is no penalty for obtaining a tax ID if you’re not sure your business needs one.

EINs can be used to achieve other business objectives, including opening bank accounts and applying for credit in the name of the company. Moreover, an EIN may be required to apply for state or local permits/licenses depending on the type of business you form, and your intended business activities.

Here is a breakdown of the types of business entities that must get an EIN:

Limited Liability Company (LLC)

An LLC is a kind of hybrid tax status that offers some of the benefits of sole proprietorship and some of the protections afforded to corporations.

Trust

This is an arrangement with an individual or company that allows them to manage your estate as you wish after you are deceased.

Estate of a Deceased Individual

When someone dies, a third party, known as an administrator or executor, takes control of that person’s estate. This third party is then responsible for paying that person’s bills, debts and taxes as well as distributing any leftover estate money to those to whom it is intended.

Non-Profit Organization

This is for entities created for reasons other than making a profit, and which do not distribute any of their income to employees or officers.

Partnership

This is an agreement between two or more individuals to share the profits and liabilities of a business.

Corporation

This refers to a group of people who form a company and are legally permitted to speak and operate as one entity. A corporation is thus able to enter into contracts and other business arrangements, and yet is distinct and separate legally from its owners.

S-Corporation

This is a special type of corporation that elects to pay federal income taxes. Instead, its income or losses is divided among its shareholders, who must claim them on their personal income taxes.

Personal Service Corporation

This is reserved for those entities whose employee-owners account for more than 20 percent of the work done by that corporation, and more than 10 percent of its fair market value.

Church Controlled Organization: This applies to any church or school that is operated, controlled or funded by a church or association of churches.

How to Get an EIN

The easiest way to obtain a federal tax ID is to apply for an EIN online. Online applications only take a few minutes, and are processed within 24 hours.

Once you receive your EIN, keep this number safe like you would a Social Security Number. This nine-digit number will remain with your business in perpetuity, unless your business is required to obtain a new EIN, which is usually only necessary if the business changes ownership or is restructured to form a new type of business.

Select Your Entity Type to Apply for a Federal Tax ID Today