If you’ve formed a limited liability company (LLC), you may be wondering about the next steps. One of them is to obtain an Employer Identification Number (EIN), to help you pay taxes. The answer to the question in the title of this article, meanwhile, is probably.
What Is an EIN?
An EIN is like a social security number for your company, allowing the IRS to easily identify your business. It is also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations, a Tax Identification Number (TIN). An EIN contains information about the state the company is registered in and identifies the taxpayers required to file tax returns for the business.
It is used by employers for filing taxes and is generally required for businesses when they open a business bank account.
Who Can Get an EIN?
Any kind of business entity can apply for an EIN, including sole proprietorships, partnerships, limited liability corporations (LLCs), C-Corps, S-Corps, non-profit organizations, government agencies, estates, and trusts. Even a sole proprietorship with only one employee can obtain an EIN.
At the same time, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN, as long as you have no employees, and the business will be taxed at your personal tax rate.
You need to form your business entity before applying for an EIN because the EIN application will ask for the date of business formation and the legal name of the company. Acquiring an EIN is free and can be applied for easily online by any company based in the US or its territories.
Does Your Single Member LLC Need an EIN?
The answer to that question is “yes” if you meet any of the below circumstances:
1. If you hire employees…
You need to obtain an EIN in order to pay employment taxes.
2. If you elect to be taxed as a corporation…
You need to obtain an EIN to file tax forms. LLCs are unique in terms of taxation as their owners have a choice about how the company will be taxed. By default, an LLC is taxed like a sole proprietorship if it has one member.
But LLCs owners can instead choose to be taxed as a corporation. To do so, the LLC must file a document, referred to as an election, with the Internal Revenue Service (IRS). The LLC must then decide if it wishes to be taxed as an S corporation or a C corporation.
C Corp status means profits are taxed at the current rate for corporations (21% as of early 2022), which is significantly lower than the typical individual taxpayer rate. But keep in mind, C Corp shareholders, which includes members, must also pay taxes on their distributions (but not self-employment taxes). Thus, the C Corp is subject to what is sometimes referred to as double taxation.
As with sole proprietorship and partnership status, S Corp taxation considers the LLC a pass-through entity, which means income passes through the company and into the hands of the owners. At this point, taxes are applied at the same rate as those of individual taxpayers.
S Corps use Form 1120S to file their taxes, which is used to report the income, losses, and dividends of S corporation shareholders. S Corp shareholders do not pay self-employment taxes, which is the primary advantage of S Corp status compared to sole proprietorship or partnership.
3. If you bring on other members…
You will need to get an EIN because you will be taxed as a partnership if you have not elected to be taxed as a corporation, although you will still have pass-through taxation. You will file form 1065, which is the U.S. Return of Partnership Income, which is filed for reporting purposes only.
4. If you answer yes to any of the following…
- Do you have employees?
- Do you operate your business as a corporation or a partnership?
- Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco, and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers’ cooperatives
- Plan administrators
Benefits of Having an EIN
There are several reasons to have an EIN, even if you’re not required to have one.
- If you have no employees but may hire some at some point, an EIN allows you to do so. You will need it to set up your payroll and the IRS will use it to track your payroll taxes. You will also need it to file your state employer taxes.
- It gives your business a separate identity from you, helping you keep your personal and business finances separate.
- An EIN allows you to open a business bank account, which, again, helps separate personal and business finances and accounting. You will also have access to other business banking services, such as a business credit card or a small business loan.
- Just as your personal credit is tracked by your social security number, your business credit is tracked by your EIN. Having an EIN allows you to build a business credit history.
- You can reduce your risk of identity theft by not using your social security number for business purposes. As a sole proprietor, with an EIN you’re not required to give your social security number to vendors and clients, increasing your privacy and security.
How to Get an EIN
The application is free and can be found on the IRS website. The application is form SS-4, and it can be mailed to the IRS or submitted electronically. Once your information on the online application has been validated, your EIN is assigned immediately. The EIN will never expire and is never duplicated, even if you go out of business.
If you’re not a U.S. citizen and do not have a social security number, you can still apply for an EIN. If you have just come to the U.S. and are planning to start a business, or if you’re expanding your business to the U.S., you should form your business entity first, then apply for your EIN.
So, the answer to the title question is yes and no. If you have no employees, are taxed as a sole proprietorship, and don’t answer yes to any of the above-mentioned questions, you do not need an EIN. You can simply use your social security number for tax reporting purposes. You can, however, get one if you choose to, for the purpose of opening a bank account or for the other benefits discussed.
But if you meet any of the other circumstances listed above, you do indeed need an EIN for your single-member LLC, and you will likely be happy to have one, as it confers many advantages.