Tax identification number

What Is a Tax Identification Number?

A Tax Identification Number (TIN) is a unique nine-digit number used by the Internal Revenue Service (IRS) to identify individuals and entities for the administration of U.S. taxes. It serves as a crucial identifier within the broader category of taxation, allowing the government to track financial activities, process tax returns, and enforce compliance with tax laws. Individuals, businesses, and other legal entities are typically required to obtain a TIN for various financial and tax-related purposes.²⁹,

There are several types of Tax Identification Numbers, each serving a specific role:

• Social Security Number (SSN): Issued by the Social Security Administration (SSA) to U.S. citizens and eligible non-citizens for tracking earnings and benefits, and widely used for individual tax purposes.²⁸,²⁷
• Employer Identification Number (EIN): Assigned by the IRS to business entities, acting as a "Social Security number for a business."²⁶,²⁵
• Individual Taxpayer Identification Number (ITIN): Issued by the IRS to certain resident and non-resident aliens who need a U.S. taxpayer identification number but are not eligible for an SSN.²⁴,²³
• Adoption Taxpayer Identification Number (ATIN): A temporary number issued by the IRS for domestic adoptions when the child cannot obtain an SSN in time for tax filing.²²,²¹
• Preparer Tax Identification Number (PTIN): Issued by the IRS to paid tax preparers.²⁰,¹⁹

History and Origin

The concept of identifying individuals and entities for tax purposes has evolved significantly over time. In the United States, the Social Security Act of 1935 introduced Social Security Numbers (SSNs) primarily for tracking workers' earnings and administering Social Security benefits. While not initially intended as a universal tax identifier, the SSN gradually became indispensable for individual tax reporting due to its widespread adoption and unique assignment.¹⁸

For businesses, the need for a distinct identifier grew with the complexity and volume of commercial activities. The Employer Identification Number (EIN) system was formally established by the IRS in 1974 under the Tax Reform Act. Prior to this, the IRS utilized a different system for business tracking. The EIN provided a consistent and systematic method for the IRS to monitor corporate entities and ensure adherence to federal tax laws, becoming a crucial aspect of business administration.¹⁷,

Key Takeaways

• A Tax Identification Number (TIN) is a unique identifier used by the IRS for tax administration and compliance.
• Common types include Social Security Numbers (SSNs) for individuals and Employer Identification Numbers (EINs) for businesses.
• TINs are required for filing tax returns, opening financial accounts, reporting income, and other official financial transactions.
• The IRS issues most TINs, with the Social Security Administration (SSA) issuing SSNs.
• Protecting your TIN is vital to prevent identity theft and financial fraud.

Interpreting the Tax Identification Number

A Tax Identification Number itself does not carry a specific numerical value or interpretation; rather, its importance lies in its role as a unique identifier within the financial planning and regulatory landscape. When an individual or entity provides a Tax Identification Number, it signals their unique identity for tax purposes to the IRS and other financial institutions. For example, an Employer Identification Number (EIN) identifies a specific business, allowing it to hire employees, open bank accounts, and file business-specific tax documents. Similarly, an Individual Taxpayer Identification Number (ITIN) allows foreign nationals without an SSN to fulfill their U.S. tax obligations, even though it does not grant work authorization or eligibility for Social Security benefits.¹⁶,¹⁵ The presence and accuracy of a TIN are crucial for the proper reporting of revenue and financial transactions.

Hypothetical Example

Consider a freelance graphic designer, Sarah, who operates as a sole proprietor. Initially, for her personal tax obligations, she uses her Social Security Number as her Tax Identification Number. As her business grows, Sarah decides to hire an assistant. At this point, to comply with federal regulations for employers, she must apply for an Employer Identification Number (EIN) from the IRS. This new EIN will be her business's unique Tax Identification Number, used for reporting payroll taxes, filing employment tax returns, and opening a dedicated business bank account. She will continue to use her SSN for her personal income tax return, but the EIN will identify her business entity for all employment-related and business-specific tax filings.

Practical Applications

Tax Identification Numbers are fundamental to numerous financial and legal processes. In the realm of investments, individuals and entities must provide their TINs to brokerage firms when opening accounts, as these firms are required to report investment income, such as interest, dividends, and capital gains, to the IRS. For businesses, an EIN is essential for nearly all operations, including applying for loans, establishing credit, and interacting with government agencies.

TINs are also critical for information reporting. For instance, U.S. businesses paying independent contractors must collect a Form W-9, which includes the contractor's TIN, to accurately report payments on Form 1099-NEC. Similarly, foreign individuals and entities receiving U.S.-sourced income may need to submit a Form W-8BEN or other W-8 series forms, often including their foreign TIN, to certify their foreign status and claim treaty benefits to reduce or avoid U.S. tax withholding.¹⁴,¹³ The IRS and SSA provide detailed guidance on the application and use of various Tax Identification Numbers through their official websites.¹²

Limitations and Criticisms

While essential for tax administration, Tax Identification Numbers, particularly the Social Security Number (SSN), face limitations and criticisms primarily concerning privacy and security. The widespread use of the SSN as a general identifier beyond its original purpose has made it a prime target for identity theft. Scammers may use stolen SSNs to open fraudulent accounts, obtain credit, or even file false tax returns, leading to significant financial and personal distress for victims.¹¹

Critics argue that the SSN's broad application makes individuals vulnerable, as a single compromised number can expose a vast amount of personal and financial information. Although the Social Security Administration and other government agencies operate under the Privacy Act of 1974 to protect personal information, the pervasive nature of SSN collection across various private and public sectors increases the risk of data breaches.¹⁰,⁹,⁸ Furthermore, the reliance on TINs for tracking all financial activity, while effective for tax purposes, can sometimes be viewed as overly intrusive by privacy advocates. Ensuring robust data security measures and educating the public about the careful handling of these numbers are ongoing challenges.

Tax Identification Number vs. Social Security Number

While often used interchangeably, particularly for individuals, a Tax Identification Number (TIN) is a broad category of identifiers, whereas a Social Security Number (SSN) is a specific type of TIN. All SSNs are TINs, but not all TINs are SSNs. The key distinction lies in their issuer and primary purpose. The Social Security Administration issues SSNs mainly for tracking individual earnings for Social Security benefits and are universally used for personal U.S. taxes. In contrast, the IRS issues other types of TINs, such as the Employer Identification Number (EIN) for businesses and the Individual Taxpayer Identification Number (ITIN) for non-citizens who need to file U.S. taxes but are not eligible for an SSN. Essentially, the TIN is the overarching term for any number used to identify a taxpayer, while the SSN is the most common form of TIN for individuals.⁷,

FAQs

Who needs a Tax Identification Number?

Generally, anyone who earns income in the U.S. that is subject to tax reporting, or operates a business, needs a Tax Identification Number. This includes individuals, businesses, non-profit organizations, and other legal entities.,⁶

How do I get a Tax Identification Number?

The process depends on the type of TIN. Individuals typically obtain a Social Security Number (SSN) through the Social Security Administration. Businesses apply for an Employer Identification Number (EIN) directly with the IRS. Non-resident aliens who need a tax ID but don't qualify for an SSN can apply for an Individual Taxpayer Identification Number (ITIN) using IRS Form W-7.⁵

Can one person have more than one Tax Identification Number?

Yes, it is possible for an individual to have more than one Tax Identification Number. For example, a U.S. citizen operating a business as a sole proprietor might use their Social Security Number (SSN) for personal income taxes and also obtain an Employer Identification Number (EIN) for their business operations. However, generally, you should only have one of each type of TIN for your specific tax identity (e.g., one SSN, one EIN per business entity).⁴

Is a Tax Identification Number confidential?

Yes, Tax Identification Numbers are considered confidential and should be protected due to their sensitivity and potential for identity theft. Government agencies like the IRS and SSA have strict regulations, such as the Privacy Act of 1974, governing their collection, use, and disclosure. Individuals should be cautious about sharing their TINs and question why it is needed if requested by an unfamiliar source.³,²

What happens if I don't have a Tax Identification Number when required?

If you are required to have a Tax Identification Number and do not provide one, you may face penalties from the IRS. This could include delayed processing of tax returns, incorrect tax withholding, or the inability to open certain financial accounts. In some cases, payments made to you may be subject to backup withholding at a statutory rate if a valid TIN is not provided.¹