Are you a small business owner or self-employed person and you’re wondering whether you need a federal tax identification number? This article will answer that question.
Generally speaking, whether or not you need a federal ID number depends on what type of business entity you own. Here are the possibilities.
1. Sole proprietorship. If you are operating your business as an unincorporated sole proprietor, you may not need to obtain a federal ID number because you can begin by using your Social Security number (SSN) as your tax ID. When you file your income tax return, you would report your SSN on Schedule C and that is sufficient.
However, there are situations when a sole proprietor is required to get a federal ID:
1) if you hire any employees
2) if you file any pension plan returns
3) if you file any federal excise tax returns
The most common of these three scenarios is the first one — hiring employees. If you are doing all the work yourself, then you don’t need to concern yourself. But if you hire just one employee (even if that employee is your spouse), then you must obtain a federal ID and issue paychecks, withhold payroll taxes, make timely payroll tax payments, and file payroll tax returns. And your federal ID will be used on all these payroll related documents. This is why the federal tax ID is also known as an employer identification number (EIN).
2. Other entity types. If you operate your business as any type of entity other than a sole proprietorship, then you must obtain a federal tax ID for your business. This includes any of the following business types: partnership, C Corporation, S Corporation, and limited liability company (LLC). And you must get a federal ID for any of these entities whether or not your business has employees.
To get an EIN, you must apply for one with the Internal Revenue Service in one of three ways:
1. By visiting the IRS website at http://www.irs.gov/businesses/small. Click on the EIN link and complete the web-based application. You will receive your ID immediately upon successful submission of the required information.
2. By phoning the IRS at 1-800-829-4933 between the hours of 7:00 am and 10:00 pm local time.
3. By sending a paper copy of Form SS-4 (Application for Employer Identification Number) to the IRS via fax or snail-mail. You can obtain Form SS-4 from the IRS website. Follow the instructions to learn how to complete the form.