Employer Identification Number (EIN)

Definition

The Employer Identification Number (EIN) is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to businesses operating in the United States for identification purposes. Similar to a Social Security Number for individuals, the EIN is used by the IRS to track a company’s tax obligations. It’s necessary for various business needs such as hiring employees, opening a bank account, and filing tax returns.

Phonetic

The phonetics for Employer Identification Number (EIN) is:Employer – /ɪmˈplɔɪ.ɚ/Identification – /aɪˌdɛntɪfɪˈkeɪʃən/Number – /ˈnʌmbər/EIN – /iː aɪ ɛn/

Key Takeaways

1. An Employer Identification Number (EIN) is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to businesses for tax purposes. It’s often referred to as an FEIN (Federal Employer Identification Number) or FTIN (Federal Tax Identification Number).
2. Not every business requires an EIN. Sole proprietors, for example, can operate without an EIN. However, if the business hires employees, has a Keogh plan, operates as a partnership or corporation, etc., obtaining an EIN is mandatory.
3. The EIN is used by the IRS for identification and it doesn’t expire. Once an EIN has been assigned to a business entity, it cannot be used by another business. If a business changes its business name, location or adds locations, the EIN does not need to be changed. The process to apply for an EIN is free of charge from the IRS.

Importance

The Employer Identification Number (EIN) is important because it essentially serves as a Social Security number for a business entity. This unique nine-digit number assigned by the Internal Revenue Service (IRS) is used by the federal government to identify businesses for taxation purposes. Companies need an EIN to pay employees, open bank accounts, apply for business licenses, and file tax returns. Moreover, it is required when seeking eligible business contracts, filing electronic tax returns and statements, and in order to comply with IRS tax reporting obligations. Notably, this identifier is also essential during interactions with other businesses, for example, when reporting information about independent contractors. Essentially, an EIN supports the efficient organization, identification, and lawful operation of businesses across the U.S. economy.

Explanation

An Employer Identification Number (EIN), often referred to as a tax ID number, is a unique identifier assigned to businesses by the Internal Revenue Service (IRS). Its main purpose is to identify and regulate the tax account of a business entity, effectively serving the same role as a social security number, but for businesses instead of individuals. As such, it plays a vital role in the administration of tax laws in the United States and is crucial for every business. Beyond tax purposes, an EIN is also utilized in various business-related functions. It is required when applying for business licenses, opening a bank or financial account under the business name, or establishing credit for the business. If a business opts to hire employees, the EIN is necessary for reporting employment taxes. It is also used in the filing of electronic returns and statements and in the dealing of documents with the IRS and Social Security Administration. Indeed, an EIN is pivotal to the smooth operation of businesses, concurrently enabling them to abide by federal tax obligations.

Examples

1. Starting a Business: Consider the case of John, who is looking to start his own restaurant in New York. As he plans to hire employees, he will need to apply for an Employer Identification Number (EIN) from the IRS. This unique nine-digit number is used to identify John’s restaurant for tax purposes and enables the IRS to track his business’s tax reporting. 2. Opening a Business Bank Account: Lisa, the owner of a boutique fitness studio, wants to open a bank account for her business. The bank informs her that since the account will be in the name of her business, she will need to provide an EIN. Her EIN identifies her business for tax purposes and is also used by banks to follow federal regulations related to money laundering. 3. Filling Out W-9 Forms: An independent contractor named Alex is hired by a technology company for a six-month project. For tax reporting purposes, the company requires Alex to fill out a W-9 form, which includes providing an EIN if Alex operates his freelance business as a corporation or partnership, rather than as a sole proprietor.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Tax Identification Number
• Internal Revenue Service (IRS)
• Business Tax Return
• Sole Proprietorship
• Limited Liability Company (LLC)

Sources for More Information

• Investopedia
• Bank of America
• Wikipedia
• Cornell University