It’s common for people to think an Employer Identification Number (EIN) is the same as a tax ID. Though used interchangeably, the terms are a bit different. It’s important to know the difference, especially if you are setting up your business. The terms are related, with a tax ID being somewhat of an umbrella term and EIN a specific set of digits.
Still, they’re not exactly the same. The difference is notable, especially when it comes to creating a strong foundation for your new business. In this guide, we’ll cover what you need to know, including what an EIN is, what a tax ID number is, and when businesses typically need one.
What is a tax ID number?
A tax ID number is used to identify individuals or businesses specifically for tax purposes. It is a nine-digit identification number used for tax purposes. There are several types of tax ID numbers:
- Social Security Number (SSN) used for individual taxpayers
- Individual Taxpayer Identification Number (ITIN) is used for individuals for tax reporting for non-citizens or foreign nationals
- Employer Identification Number (EIN) assigned to businesses, estates, and trusts
So are an EIN and a tax ID the same? Not quite. Tax ID is often used as a broad umbrella term rather than a representative of a specific number.
What is an EIN?
An Employer Identification Number (EIN) is a specific type of tax ID issued by the IRS for businesses. Sometimes called a Federal Tax ID or FEIN. It functions much in the same way that your SSN works, though it is for a business.
There are numerous reasons you need an EIN:
- You’re hiring employees. You’ll use this information to report their taxes to the federal government.
- You’re earning money. Your EIN helps you with filing business taxes.
- You’re managing your company’s money. You’ll need it to open a business bank account.
- You need licenses to operate. You’re applying for licenses or permits.
Not every business is legally required to have an EIN, but most businesses still choose to get one. So what is the difference between an EIN and a tax ID number?
As a business, you’ll likely need to obtain an EIN. EIN vs tax ID comes down to a few things:
- An EIN is a type of tax ID number
- But not all tax ID numbers are EINs
Think of it like this. You use your SSN in various ways throughout your life. It’s how the IRS knows who you are. Your EIN is much the same, but for your business.
- An SSN is a personal tax ID
- An EIN is a business tax ID
When you hear someone refer to a tax ID, that can apply to various types of identifying numbers. For example, you may need to fill out a loan application with a tax ID. If it is a personal loan in your name, you would use your SSN. If you’re borrowing for your business, you’ll need an EIN.
Tax ID vs EIN can seem like a small difference, but reporting the right number is very important as a business. You do not want to mix personal and business information.
Do I need an EIN for my business?
Some businesses are required to get an EIN. Others are not. The following are some of the most common businesses that need an EIN.
- Businesses with employees must obtain an EIN
- Partnerships
- Corporations
- Multi-member LLCs
- Business filing certain tax returns
Most banks require an EIN if you want to open a business bank account. This helps clarify that your business is identifiable to the IRS. That could come into importance when reporting activity or interest to the government.
Your business may not need an EIN if you are a sole proprietor without employees. It’s just you running and managing your business. In these situations, some businesses elect to use their own SSN instead. You’re not required to obtain an EIN if all of the above is true.
Why many small business owners still get an EIN
Even if you’re not required to have an EIN, there’s very valid reasons for having one, and its important to understand how to get an EIN number. In many situations, these numbers can provide significant help with organizing your business’s financials and keeping business and personal information separate.
Many small business owners get an EIN because they can help to:
- Separate business and personal finances. It’s clear what is personal and what is business.
- Keep your SSN private. Share your EIN with your vendors or clients as needed, but not your personal SSN
- Establish financials. Banks often require them for banking and payment processing requirements.
- Build business credibility. You want to build business credibility by being distinguished from a personal SSN.
Now, here’s an important limitation.
Getting an EIN does not automatically create an LLC or change tax treatment. That’s a very different process.
How to apply for an EIN
You can get an EIN for your LLC or other business structure. The process is straightforward. To get an EIN you’ll apply for it directly on the IRS website. This process requires you to supply some basic information, and the IRS will then determine if you should have an EIN. If so, they will issue it. The IRS will require you to provide:
- Business structure details
- A responsible party
- Business activity
Online applications are typically processed quickly. You should receive your EIN right away and can start using it immediately.
Most businesses only need one EIN per entity. However, if there is a significant change in the business’s structure or the ownership changes, then a new EIN may be necessary.
Common misconceptions about EINs and tax IDs
Is a tax ID and an EIN the same? We’ve already covered that the two are different. However, there are often a few other misunderstandings about these numbers and how they work. Here’s our help.
Misconception: EIN and tax ID always mean the exact same thing
That’s not the case. An EIN is a type of tax ID, but not all tax IDs are EINs. A SSN is also a type of tax ID. When asked for a tax ID, you need to know which to supply to provide accurate information.
Misconception: Every business legally needs an EIN
That’s also not the case. The simplest example of one that doesn’t is a sole proprietorship. If you’re operating without any formal business formation and filing taxes using your Social Security Number, you may not need an EIN.
Misconception: Getting an EIN creates a business entity automatically
This is a big mistake. An EIN does not create a business entity. It does not establish a business as separate from you. It’s only an identification number.
Misconception: An EIN changes how a business is taxed by itself.
That’s also not the case. An EIN does not establish or form a business or change how your business is taxed. Rather, the structure of your business makes the difference here. Both LLCs and corporations, for example, have EINs but have very different taxation processes.
EINs are identifiers. They are not a business structure. They are not for tax elections. They are just numbers to identify your business.
Preparing your business before applying for an EIN
Before you apply for an EIN, it’s a good idea to have your business set up properly. A few simple steps taken now can make organizing your business a bit easier later.
- Business structure: Determine what the ideal business structure is for your company. Forming an LLC, for example, may be best to separate your business operations from your personal assets.
- Business name: Select a business name and verify that no other party is using that name. You also need to be sure the name meets all of the requirements set by your state.
- Name a responsible party: This could be the owner of the business or any other party that you determine will represent the business in official manners.
- Business address: Where will your business operate from? This could be your home, but it may also be a leased space or third-party destination.
- Planned business activities: Business activities refer to how you will make income and what activities you plan to engage in, such as maintaining accurate books
Organized business information helps simplify taxes, banking, and compliance later. These are all steps you can complete rather quickly and be able to use that information to build your business from the ground up. It sounds like a lot of work, but putting in the time to get this done now protects you later.
Platforms like Tailor Brands can help you with most of these steps, minimizing the confusion and helping to get it done properly and right away. That includes forming your business, obtaining an EIN during the setup process, and organizing your business documents and compliance information in a single place.
Conclusion
EINs and tax IDs are certainly related terms, but they are not identical. And that’s an important difference that you need to know if you are establishing your business. An EIN is a specific type of tax ID that businesses obtain to be recognized by the IRS for tax reporting purposes and for additional tasks. If you’re planning to start a business, this is one component of the process.
When you understand the difference between these two, you are better able to make decisions related to taxes, banking, and business setup more confidently. What’s more, EINs are very common components of business establishments. Many businesses choose to get an EIN even when it is not strictly required to do so.