Employer identification number

What Is an Employer Identification Number (EIN)?

An employer identification number (EIN) is a unique nine-digit federal tax identification number assigned by the Internal Revenue Service (IRS) to business entities operating in the United States. Similar to how an individual is identified by a Social Security Number, an EIN serves as a distinct identifier for businesses for purposes of Taxation and other official functions⁷⁰, ⁷¹. This number is crucial for various financial and legal activities, including filing tax returns, establishing payroll, and opening a business bank account⁶⁷, ⁶⁸, ⁶⁹.

History and Origin

The concept of identifying businesses for tax purposes evolved with the growth of commerce in the United States. The modern employer identification number system was established by the IRS in 1974, providing a standardized and comprehensive method for tracking diverse business entities⁶⁶. Prior to this, different systems were used to manage business tax reporting. The introduction of the EIN streamlined the process, ensuring consistent identification and compliance with federal tax laws for a growing number of businesses, regardless of their size or structure⁶⁵.

Key Takeaways

• An employer identification number (EIN) is a unique nine-digit federal tax ID issued by the IRS for businesses⁶³, ⁶⁴.
• Most businesses, including corporations, partnerships, and multi-member limited liability company (LLC) structures, require an EIN for tax filing and operational purposes⁶⁰, ⁶¹, ⁶².
• An EIN is necessary for hiring employees, opening business bank accounts, and applying for certain licenses and permits⁵⁷, ⁵⁸, ⁵⁹.
• Applying for an EIN is free and can often be completed online through the IRS website, with the number typically issued immediately⁵⁵, ⁵⁶.
• Businesses may need a new EIN if their legal structure or ownership significantly changes, such as a sole proprietorship incorporating⁵³, ⁵⁴.

Interpreting the Employer Identification Number

The employer identification number itself is a static identifier and does not carry an inherent numerical value to be interpreted in a financial sense. Its significance lies in its unique assignment to a specific business entity for identification by the IRS⁵². The format of an EIN is typically XX-XXXXXXX⁵⁰, ⁵¹. While the first two digits historically indicated a geographic area, this is no longer the case, and the number primarily serves as a distinct digital fingerprint for tax and regulatory compliance. For example, when a company issues a W-2 form to an employee or files a corporation tax return, the EIN is the primary identifier used to connect these documents to the correct business⁴⁸, ⁴⁹.

Hypothetical Example

Consider Sarah, who decides to start a small web design business. Initially, she operates as a sole proprietorship and uses her Social Security Number for tax purposes. Her business grows, and she plans to hire an assistant within the next few months. To legally hire an employee and manage payroll taxes, Sarah must obtain an employer identification number. She visits the IRS website, completes the online application (Form SS-4), and receives her EIN immediately. With this new EIN, she can set up her payroll system, withhold employee taxes, and file the necessary employment tax forms with the IRS, ensuring her business operates in full compliance.

Practical Applications

The employer identification number is a cornerstone of business operations in the United States, essential across various sectors:

• Tax Compliance: Businesses use the EIN to file federal tax returns, including income tax, employment tax, and excise tax returns. It is how the IRS identifies and tracks a business's tax liabilities⁴⁵, ⁴⁶, ⁴⁷.
• Financial Operations: Opening a business bank account is a fundamental step for any formal business, and most financial institutions require an EIN for this purpose⁴², ⁴³, ⁴⁴. It is also often required for applying for business loans and lines of credit⁴¹.
• Hiring and Employment: Any business with employees must have an EIN to report wages and employment taxes to the IRS and the Social Security Administration³⁹, ⁴⁰. This includes filing forms like Form W-2 and Form 941.
• Business Formation: Certain legal structures, such as corporations, partnerships, multi-member limited liability companys, non-profit organizations, trusts, and estates, are required to obtain an EIN regardless of whether they have employees³⁷, ³⁸. Information on who needs an EIN and how to apply is available directly from the IRS. IRS Employer ID Numbers (EINs)

Limitations and Criticisms

While essential for business identification and tax administration, the employer identification number itself has few inherent limitations or criticisms. It serves primarily as a unique identifier. However, misuses or misunderstandings can arise. For instance, an EIN is not intended for personal use and should not be used in place of a Social Security Number (SSN) for individual purposes³⁵, ³⁶. Businesses must apply for a new EIN if their legal structure changes significantly, such as a sole proprietorship becoming a corporation or partnership³³, ³⁴. Failing to obtain a new EIN when required can lead to tax compliance issues. Additionally, the IRS limits EIN issuance to one per responsible party per day to ensure fair and equitable treatment for all taxpayers, which can impact businesses needing multiple EINs for various entities on the same day³¹, ³².

Employer Identification Number vs. Social Security Number (SSN)

The employer identification number (EIN) and the Social Security Number (SSN) are both nine-digit identifiers issued by the U.S. government for tax purposes, but they serve distinct roles. An EIN identifies a business or other entity, while an SSN identifies an individual²⁹, ³⁰. The IRS issues EINs, whereas the Social Security Administration (SSA) issues SSNs²⁷, ²⁸. Businesses use their EIN for business-related tax filings, opening corporate bank accounts, and hiring employees²⁵, ²⁶. Conversely, individuals use their SSN for personal income tax filings, employment records, and accessing social benefits²⁴. Although a sole proprietor without employees may use their SSN for business tax purposes, obtaining an EIN can help separate personal and business finances and may be required for other activities like opening a business bank account²², ²³. It is critical not to use an EIN in place of an SSN or vice versa for inappropriate purposes²⁰, ²¹. More details on the distinct roles of these identifiers can be found on the SSA's website. SSA Social Security Number

FAQs

Who needs an employer identification number?

Most businesses in the United States need an employer identification number. This includes any business entity that has employees, operates as a corporation or partnership, files employment, excise, or alcohol, tobacco, and firearms tax returns, or withholds taxes on income paid to non-resident aliens¹⁷, ¹⁸, ¹⁹. Certain trusts, estates, and non-profit organizations also require an EIN¹⁵, ¹⁶. Even sole proprietorships and single-member LLCs without employees may choose to get an EIN to separate their business and personal finances or for banking purposes¹³, ¹⁴.

How do I apply for an EIN?

You can apply for an employer identification number for free directly through the IRS. The fastest method for U.S.-based businesses is the online application system, which provides the EIN immediately upon completion¹¹, ¹². You can also apply by fax, mail, or phone for international applicants⁹, ¹⁰. The application requires completing Form SS-4, Application for Employer Identification Number, which asks for details such as the business's legal name, address, entity type, and the reason for applying⁷, ⁸.

Is an EIN the same as a Taxpayer Identification Number (TIN)?

No, an employer identification number (EIN) is a type of Taxpayer Identification Number (TIN), but not all TINs are EINs⁴, ⁵, ⁶. A TIN is a broader category that encompasses several identification numbers used by the IRS for tax administration³. Other types of TINs include Social Security Numbers (SSNs) for individuals and Individual Taxpayer Identification Numbers (ITINs) for resident and non-resident aliens who need to file taxes but are not eligible for an SSN¹, ². Essentially, an EIN is specifically for businesses and other entities, while TIN is a general term that can refer to any of these identifiers. More information about various TINs can be found on the IRS website. IRS Taxpayer Identification Numbers (TIN)