Whether you’ve operated your small proprietorship for some time or you’re just getting started with your business, you’ve probably heard of a tax ID number or you’ve seen it requested on paperwork. For sole proprietorships, navigating the tax ID landscape can get a little puzzling, but a few key pieces of information should be helpful.
What Purpose Does a Tax ID Serve?
Technically, both organizations and individuals have a tax ID number, but individuals use their Social Security Numbers while organizations usually need a specially-assigned nine-digit employer identification number, or an EIN. The Internal Revenue Service uses both SSNs and EINs to track tax obligations for people and organizations in the United States. There are a few ways to perform a tax ID number lookup, and you’ll usually use your own in several specific scenarios:
- Completing tax returns
- Paying employees
- Opening a bank account
- Other government paperwork you might submit
Sole Proprietorships and the EIN
While the IRS explicitly mandates corporations, partnerships, nonprofits and other groups to obtain their own EINs, it allows most sole proprietors to utilize their SSNs for tax filing purposes. Nevertheless, certain circumstances may require sole proprietorships to apply for a business-specific tax ID:
- Filing pension, excise or Alcohol, Tobacco and Firearms tax returns
- Hiring an employee
- Ownership transfer of the business due to death or inheritance
- Change of entity type (for example, from partnership or corporation to sole proprietorship)
Even if you don’t encounter any of these situations, an EIN can be useful for other reasons. Some banks require sole proprietorships to have one before opening a business bank account, and an EIN makes it easier to separate business and personal expenses so that you can be successful.
A Fast and Easy EIN Application Process
Use the IRS EIN Tax ID Filing Service for a quicker, more convenient way to obtain your EIN number. If you have any questions about the process or about tax ID numbers, you can contact the company directly.