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.
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.