7 Benefits of an Employer Identification Number (EIN)
Key benefits of an Employer Identification Number and why your business needs one regardless of how small your business is.
What is an Employer Identification Number?
An Employer Identification Number or in short EIN. It is used by the Internal Revenue Service (IRS) to identify a business for tax purposes. Another name for an EIN is Federal Tax Identification Number. An EIN is a nine-digit number and looks like a social security number. It is given to a company which then uses it for tax purposes. It is given by the IRS (Internal Revenue Service) to identify your business and by you for your tax reporting purposes. You can also use it as an identifier for lots of other purposes. It is also better in terms of your data and personal information protection and business opportunities.
An EIN is typically required if a company plans to hire employees or has plans to do so in the near future. It not only provides this feature but other benefits as well. For example, an EIN is required to have certain business structures, such as a corporation (C and S corps), partnership, or a limited liability company (i.e. an LLC). It is not required for sole proprietors and DBA’s (doing business as). A Social Security Number is enough in these cases. Once an EIN is issued it does not need to be reissued as it does not expire. Therefore, there is no extra work of renewing an EIN.
How do you get an EIN?
The easiest and fastest way to get an EIN is to apply online. Also, you can get an EIN by mail, fax or telephone. For specific details about how to get an EIN, including links to the appropriate IRS.gov pages, go to this article, Do I Need an Employer Identification Number and How to Get One.
What are the Benefits of Having an Employer Identification Number (EIN)?
1. Avoid Fines and Penalties
Some businesses are required to have an EIN. An EIM might be required even if the business is small, such as a freelancer or sole proprietor. Further, a business that is required to have an EIN, but does not have an EIN and files business taxes without one, is subject to fines and penalties. Does your business need an EIN? If your business has employees then you need an EIN. However, that is an oversimplified explanation of who is required to have an EIN. Even if you are a small business, a freelancer or independent contractor, you might be required to have an EIN. It is a common misconception that EINs are only required for large companies. For a detailed and complete understanding of what businesses are required to have an EIN please review our article, Do I Need an Employer Identification Number and How to Get
If your business does indeed require an EIN be sure to apply for one well before your business taxes are due. This is because, depending on how you apply for your EIN, the can take up to five weeks before receiving it from the IRS. Other than filing business taxes, an EIN is needed for changing organization type or for establishing trust, retirement or pension plans. Also, an EIN is required for purchasing an ongoing business.
2. Identity Theft Protection
You no longer need to use your Social Security Number for your business taxes when you have an EIN. This means that your Social Security Number is exposed to outsiders and strangers less. Thus, it is less susceptible to theft, resulting in identity theft. For example, when you are employed by another company to provide your services, you provide a Federal Tax Identification Number. EIN protects the individual from identity theft. Surprised to hear that? Yeah it’s true. Having an Employer Identification Number will separate your business finances from your personal ones. Once you get your EIN you can provide the vendors with it or your other business dealings instead of providing your SSN and keep it more private as it could be stolen and the thief getting access of all your hard earned money. Using SSN regularly for different business dealings makes the chances of theft higher.
If you are a freelancer or if you work as an independent contractor then providing your client with an SSN or an EIN is a necessity to take the dealing forward. Having an Employer Identification Number will add credibility to your name potentially bringing new customers. As EIN is mostly for business use. Therfore, it also signifies that you have a real business and you take it seriously.
Providing a client with an EIN, as opposed to your Social Security Number is simply more professional. It is also attractive for companies to see that you are an independent contractor as proven by the Business tax ID or better known as EIN, rather than an employee hence increasing your chances of getting hired.
5. Get Business Loans Easier
To get a business loan having a business bank account makes it easier. In order to open a business bank
Having an employer identification number speeds up the business loan application process. Many lenders may not require for you to have an EIN and would provide you with the loan if you have the necessary documents and licenses but others require you to have a business account to make the loan payments which is not possible without an EIN.
6. Establish Business Credit and Trust
When a business has a bank account it builds credit with the bank. Often vendors and prospective clients will want to check a businesses credit before doing business with you. This is similar to checking an individuals credit before doing business with an individual. Therefore, build trust with your vendors by having good business credit. In order to build and have good business credit, you first need a business bank account. To get a business bank account you need an EIN.
7. Easier to Grow
Having an EIN makes it easier to expand your business if you plan on growing. One reason for this is because you can’t hire employees unless you have an EIN. Imagine this, you’re business is growing rapidly and all of a sudden you need to bring on extra help, as you can no longer survive alone. Also, the extra help that you need is someone who is a full-time employee, not a contractor.
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