Do you need an EIN?

When it comes to businesses and taxes, things can get very complicated very quickly. No one wants their profits to be unceremoniously sucked up by Uncle Sam's money vacuum because they missed something important when setting things up. One question that people often ask is whether or not they need to obtain an Employer Identification Number (EIN). Let's take a closer look at what EINs are and how they're used.

First, an Employer Identification Number contains nine digits – just like a Social Security number. To distinguish it, the format incorporates a single dash between the second and third digits. This format is automatically recognized by computers as an EIN number.

Any person (or entity) that files taxes needs an identification number of some kind. It's how the IRS tracks who's paying what to where and when. For people who are employed by someone else, their Social Security number is used (this can also apply to people who, in addition to being employed by another company or person, also run a small business from home). Some self-employed people, on the other hand, have a choice when it comes to identifying themselves for tax-reporting purposes. In some instances a Social Security number can be used on the tax return (for example, for sole proprietorships), but at other times a different identifier is necessary. This is the where the Employer Identification Number comes in. Although known by a number of slightly-different names – Tax Identification Number (TIN), Federal Tax Identification Number (FTIN), and Federal Employer Identification Number (FEIN) – it has one but purpose, which is to identify businesses that have employees.

Not every business needs an EIN. However, all businesses that employ workers are required by law to pay and withhold taxes for them, and must therefore have a Number. Depending on the information found on the employee's W-4 form, a spreadsheet is used to determine the amount of Medicare-, Social Security-, federal- and state taxes to be deducted from the gross earnings. (Employers actually shoulder a portion of the assessed taxes for each employee.)

There are other reasons to use an EIN. For example, additional taxes are routinely levied on certain businesses. Any organization that's required to pay excise or ATF (Alcohol, Tobacco, and Firearms) taxes must also have an Employer Identification Number.

Additionally, if a business is categorized as anything other than a sole proprietorship, an EIN is needed. Partnerships and all corporation-type business entities are required to pay taxes at a different rate than that of sole proprietorships. As such, they also must have an Employer Identification Number.

Does the business have a retirement plan? Regardless of whether you have employees or not, if a retirement fund (such as a Keogh plan if you're self employed) is set up for the business, you'll need another identifying number for the tax forms other than your Social Security number.

EIN numbers are used for other organizations, as well. For instance, non-profits, cooperatives, and certain plan administrators must use an Employer Identification Number when filing tax forms.