Why You Need a Federal Tax ID Number

Posted on: February 13, 2019

It's been said that, in life, there are only two things that cannot be avoided: the first, of course, is death, and the other is taxes. The US federal government requires that all employees have a Social Security number which is a necessity if you hope to collect Social Security retirement benefits someday in your future. In a similar vein, if you're an employer, then want you to have an Employer Identification Number or EIN, which you may know better as a federal tax ID number.

Do You Need a Federal EIN?

While the majority of reasons for obtaining an EIN have to do with the establishment and workings of a new or even modified business entity, there are plenty of other reasons why you need a federal EIN. For example, if you've created a pension plan (and you are the plan administrator) or if you own a trust, you will need an EIN. If you represent or administer a deceased person's estate, that is another reason for getting an EIN. Think you're off the hook because you're a non-resident alien? Not so fast! If you're not a US citizen, you will still need a federal tax ID to comply with certain withholding requirements.

As a business owner, you will probably have to have a federal tax ID number. As a legally operating business entity (sole proprietor, a corporation or partnership, a limited liability company, etc.), you will be required to pay federal (and, more often than not, state) taxes which you cannot do without having been assigned a federal tax ID number.

Limitations Without an EIN

There are a number of business-related necessities that you won't be able to obtain if you don't have a federal tax ID number. For instance, without a federal EIN, you can't open any kind of account or apply for a loan in your company's name at a bank, credit union or pretty much any other lender. You also will not be able to apply for certain operating licenses or permits. For example, you can't obtain a liquor license for your restaurant without an EIN, and you can't sell tobacco products at your convenience store without one. Planning to open a sporting goods store and hoping to sell firearms? That can’t happen without a permit, which you won't get without a federal tax ID number; you'll be limited to fishing gear and sporting goods.

Without an EIN you can't hire staff for your company, because you will be compelled to withhold taxes against their income (or, in the case of non-residents, withholding against non-wage income). You also won't be able to establish a Keogh Plan (a type of pension which defers taxes) for your employees.

Last, but not least, without an EIN, you can't work or sign into a contractual arrangement with certain types of organizations, such as non-profits or farmers' co-ops, nor can you have a relationship with certain trusts, estates or plan administrators. That list is not all inclusive, obviously, but merely a partial list of the businesses you would be excluded from working with if you didn't have an EIN for your small business.

The IRS to the Rescue

If you're still not clear as to whether you need a federal EIN, the Internal Revenue Service's EIN portal has a series of questions that can help you find the answer. In fact, obtaining a federal tax ID number is a simple process through the EIN portal. You should be aware that, though a relatively streamlined process, it must be finished in a single sitting; there is no ability to save your work and come back to it if you need additional information. Moreover, to ensure that more than one federal EIN number is not erroneously issued to the same company, the IRS has imposed a limitation of one issuance per day per “responsible party.” According to the IRS, that limitation is imposed because there is the potential for a duplicate request by more than one “responsible party” within an organization (who might be, say, the company Treasurer or, perhaps, the CEO). Fortunately, once the application process is completed to the satisfaction of the IRS, you will receive your federal tax ID number immediately.

Is Your Existing EIN Still Viable?

If you already have an EIN, you might think you're golden. But, under some specific circumstances, you might need to get a new tax ID number. The IRS EIN portal can assist you with that, as well. A name or address change for your business might necessitate a new number, as will any change in structure, management or ownership of the entity. If you change your tax status, say from non-exempt to exempt, the IRS will require you to have a new EIN issued. Again, the IRS portal dealing with the EIN is full of information and links to get you the answers you need.

What About a State ID Number?

In some cases, a federal tax ID number alone may be sufficient for your needs. However, if your company will pay taxes in the state(s) within which it operates or is incorporated, then it's very likely you will need a separate state issued ID number. At a minimum, the state issued ID number can be used to verify your identity if the issue of identity theft of your small business should ever arise.

You should be aware that the majority of state tax departments will, at a bare minimum, impose income and employment taxes, but as each state is different you will have to do a little research. Seven of the 50 states don't have income tax (Florida, Alaska, Texas, Wyoming, Washington, Nevada and South Dakota), while New Hampshire and Tennessee impose tax only on interest income and dividends. Information for obtaining a state EIN can be found online, usually either at your state's department of taxation or revenue, or else the website of the state comptroller or treasurer.

Better Safe Than Sorry

A federal or state EIN is one of the few freebies given out by the government. Having one legitimizes your business and allows you to conduct business properly and in line with your peers. Not having one could have limitations that could hamper your profitability and, indeed, your small business' very existence. The hour or so it takes to request one will definitely be time well spent.

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