Federal Tax ID & State Tax ID: What You Should Know

September 23, 2019
Posted in: Taxes

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If you’re just starting your business or incorporating an existing business, there are steps you must take to ensure that you’re operating on the right side of the IRS and your state’s taxing authority. Obtaining the required tax ID numbers (ideally right after registering your business) is the first step. The IRS and your state’s taxing authority will use these tax ID numbers to identify (track) your business for tax filing purposes. As you’ll later see, these numbers can also help you to operate your business more cost-effectively and professionally.

The first of these tax ID numbers is the Federal Tax ID Number or Employer Identification Number (EIN). The EIN is basically a social security number for your business. Unlike an individual social security number which is issued by the Social Security Administration, the EIN is issued by the IRS. The IRS requires that it be listed on all of your business’s tax filings.

The second number is the state tax ID number. If the state in which your business operates has an income tax, you’ll need to include the state tax ID number on all tax filings so that the taxing authority properly credits your tax payments.

 

Who Needs a Federal Tax ID Number (EIN)?

Not all small businesses are required to apply for an EIN. If you’re a sole proprietorship or single-member LLC, your individual social security number can generally be used as your business’s EIN.  If your business will operate as a corporation, partnership, multi-member LLC, or non-profit organization, you’ll need to apply for an EIN.

All businesses (including sole proprietorships and single-member LLCs) need to obtain an EIN if the business: 

  • Has employees
  • Files any of these tax returns:  Employment, or Excise on Alcohol, Tobacco and Firearms
  • Withholds taxes on income, other than wages, paid to a non-resident alien
  • Has a Keogh (tax-deferred retirement) plan
  • Is involved with any of the following types of organizations
    • Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
    • Estates
    • Real estate mortgage investment conduits
    • Non-profit organizations
    • Farmers’ cooperatives
    • Plan administrators

Businesses may also need an EIN to:

 

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Other Reasons for Getting an EIN

Sole proprietorships and single-member LLCs that don’t have employees aren’t legally required to obtain an EIN. If you’re the owner of one of these entity types, you’re allowed to use your social security number (SSN) to file taxes and conduct other business.

Here are some reasons why you may still want to obtain an EIN:

  • Minimize risk of identity theft – Using an EIN instead of your SSN when working with lenders and suppliers can reduce the risk of identity theft and safeguard your personal accounts.
  • Separate business and personal finances – Using an EIN helps you to keep your personal finances separate so that the IRS, lenders, etc.  can only access your business finances.   
  • Protect limited liability status – For LLC owners, using an EIN helps to establish that your business is a separate entity and that you’re not personally liable for the business’s debts or obligations.
  • Buy from wholesalers – Most manufacturers and wholesalers won’t sell their products to you for resale unless you have an EIN.

 

How to Apply for a Federal Tax ID Number (EIN)

Although there are online sites that charge unwary businesses for this service, it’s free to apply for an EIN and there are several application methods. Before applying, you need to decide on a business structure as you’ll be asked to provide this information during the application process.

All EIN applications (regardless of how filed) must disclose the name and Taxpayer Identification Number (TIN) (social security number, individual tax ID number, or EIN) of a principal officer (if a corporation), general partner (if a partnership), grantor or trustor (if a trust), or owner (if a sole proprietorship). The IRS considers this individual or entity to be the responsible party and as such controls, manages, or directs the business and the handling of its funds and assets.

Unless the applicant is a government entity, the responsible party must be an individual (i.e. natural person), not an entity. If there is more than one responsible party, the application must indicate which one the IRS should recognize as the responsible party for the business.

The IRS limits EIN issuance to one per responsible party per day. This is done to ensure fair and equitable treatment for all taxpayers.

 

Apply Online

The online application option is available to all entities with a principal business, office or agency within the United States or U.S. territories. Because it’s the fastest and easiest, the online application is the preferred method for businesses to apply for and obtain an EIN.

The online application takes approximately ten minutes and must be completed in one session.  After 15 minutes of inactivity, the session will expire and you’ll need to start over. You aren’t allowed to save the application and finish it at a later time so it’s best to print out a copy of Form SS-4 and answer all of the questions before you begin the online application process. 

Once completed and submitted, the application is validated and an EIN is issued instantly. You can then download, save, and print your EIN confirmation notice for your records. The EIN can be used immediately for most business activities except for electronically filing taxes; for that you’ll need to wait two weeks.

 

Apply by Phone

To apply for an EIN by phone, call the IRS Business & Specialty Tax Line at (800) 829-4933, Monday through Friday from 7:00 am to 7:00 pm local time. A representative will take your business information over the phone and assign your EIN at the end of the call.

 

 

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Apply by Fax

To apply for an EIN by fax, complete the PDF version of Form SS-4 and fax it to the appropriate fax number which you’ll find in Instructions for Form SS-4 . 

Here’s the information you’ll need to provide on Form SS-4:

  • The business name and address
  • The responsible party for the business (the responsible party is usually the person completing the form and is often an owner, partner or officer).
  • The responsible party’s TIN
  • The reason for requesting an EIN
  • Type of business structure
  • If the business structure is an LLC, the number of members
  • Business start date
  • Number of employees
  • The last month of the business’s accounting year

Because businesses must submit either Form 941 or Form 944 to the IRS if they withhold payroll taxes (income, social security, Medicare) from employee wages, you can indicate on Form SS-4 whether you expect your employment taxes to be less than $1,000. If yes, you can file Form 944 annually instead of filing Form 941 quarterly to report your estimated employment taxes. 

If you want to give a third party authorization to receive the EIN on the business’s behalf, the Third Party Designee section must be completed and signed by the responsible party for the authorization to be valid. The third party designee’s authority extends to newly assigned EINs only and terminates at the time the EIN is assigned and released to the designee.

Before faxing, make sure the form contains all of the required information. The submitted application is then evaluated to confirm that your business does need a new EIN. An EIN is then assigned using the appropriate procedure for your entity type. If you provide your fax number, the EIN will be faxed to you within four business days.

 

Apply by Mail

To apply for an EIN by mail, the process is similar to faxing the application. You would complete the PDF version of Form SS-4 and instead of faxing it, you would mail it to the appropriate address which you’ll find in Instructions for Form SS-4 .  Before mailing, make sure the form contains all of the required information.

If it’s determined that your business needs a new EIN, one will be mailed to you. Applying for an EIN by mail is, of course, the slowest method. The processing timeframe is four weeks.

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Apply by Phone (International Applicants)

International applicants can obtain an EIN by calling 267-941-1099 (not a toll free number), Monday through Friday from 6 a.m. to 11 p.m. EST. Be aware that the call may be lengthy considering time waiting to speak to a representative and time spent answering questions.

The person who places the call must be authorized to receive the EIN (either as a principal of the business or Third Party Designee who is authorized to act on behalf of the business). The person making the call must also be able to answer questions related to Form SS-4. 

Form SS-4 asks questions regarding your business, such as business structure, your reason for applying for an EIN, the industry your business is in, and its U.S. mailing address. Having this information readily available will allow you to save time during your phone call (which, again, isn’t toll free). 

At the end of the call, your EIN will be issued. Write the number down and await the arrival of your official EIN letter. The letter will be mailed to your U.S. address (if you have one) a few weeks later.

 

 

Replacing an EIN

Once you’ve obtained an EIN, it’s valid for the life of your business. There are occasions, however, when you may have to replace an EIN with a new one. 

Here are some of the factors that necessitate replacing an EIN:

  • Changes in ownership (you purchase or inherit a business)
  • Changes in management
  • Change in business structure (i.e. sole proprietorship becomes a corporation)
  • Sole proprietorship declares bankruptcy
  • Partnership is dissolved and a new partnership is formed
  • Business becomes a subsidiary of a corporation

Whether you need to apply for a new EIN depends on your business structure and the kind of change that occurred.

 

Misplaced EIN

Keep your EIN letter or online confirmation print-out in a safe, convenient place for quick reference. If you lose one of these documents and didn’t write the number down, it should be pretty easy to retrieve your EIN. Your banking records, tax returns, or wholesale account applications will have the number on them.

You can also call the IRS Business & Specialty Tax Line (800-829-4933) and select EIN from the options list. As long as you can answer identifying questions to prove that you’re authorized to receive it, the representative will provide your EIN. 

 

 

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State Tax ID Number

Most states require businesses to have a state tax identification number, in addition to an EIN. A state tax ID number (also known as a state EIN, a state employer ID, or a state tax registration) is a unique number assigned to a business by the state in which it operates. If your business operates in more than one state, you’ll need a state tax ID number for every state in which you operate and file taxes.

If your state has an income tax, a state tax ID number enables you to pay state business taxes and withhold state and local income taxes from employee paychecks. Currently, there are seven states that don’t have an income tax. They are: Wyoming, Washington, Texas, South Dakota, Nevada, Florida, and Alaska.  Tennessee and New Hampshire only impose state tax on income from dividends and interest.

Similar to federal income taxes, state income taxes are due every year, usually by April 15th. Check with your state to obtain the actual date that your taxes are due. 

The state tax ID gives you authority to collect and submit sales taxes and can also be used when paying property taxes and other business-related taxes

 

 

Who Needs a State Tax ID Number?

Most states require that you obtain a state tax ID number if your business is going to hire employees, or sell goods or services (income derived from these sales are generally subject to state income tax). Businesses with employees need a state tax ID number for each state in which they hire employees.

If you plan to operate as a sole proprietorship without employees, your personal social security number can act as your state tax ID number. As soon as you hire employees, however, you’re required to obtain a state tax ID number. As with the federal EIN, there are reasons why a sole proprietor may not want to use a social security number as a means of business identification. One reason is the possibility of identify theft and the financial risk it can subject the owner to.

 

 

Does an Online Business Need a State Tax ID Number?

If your online business involves selling products, you’ll likely need a state tax ID number. If you’ll charge customers sales tax or wish to be exempt from paying sales tax on goods that you purchase for resale, a state tax ID number may be required.   

On the other hand, if you sell services online, you may not need a state tax ID number unless you sell parts or other products to clients and charge sales tax on those items. For example, an online legal service might offer do-it-yourself kits to clients. If a client prefers to have the company handle the legal matter, sales tax may not be charged on the service whereas it would be charged if the client opted for the do-it-yourself kit. 

 

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How to Apply for a State Tax ID Number

Many states require that you (1) register your business with the appropriate state agency, and (2) obtain your federal EIN, before applying for a state tax ID number.

What’s the appropriate state agency? Corporations are generally under the domain of the secretary of state. The state tax ID application can often be found on the secretary of state’s website where it can be downloaded, completed, and submitted for processing.  Other business structures generally fall under the domain of the state’s revenue department and applications are often found on their website.

Because the process and requirements for obtaining and using a state tax ID number vary by state (some states require that businesses display the tax ID certificate on the premises), you’ll need to visit your state’s revenue department website for guidance.

 

 

Differences between an EIN and State Tax ID Number

Although both the EIN and state tax ID number are used by federal and state taxing authorities to identify a business, there are significant differences between them.

 

Purpose

An EIN is a form of identification for businesses similar to how a social security number is a form of identification for individuals. The EIN’s primary purpose is to identify a business’s income tax and employment tax returns. An EIN is recognized throughout the United States and can be used to identify a business in any part of the country.  An EIN can also be used to obtain loans, open business bank accounts and apply for business licenses and permits.

The primary purpose of a state tax ID number is to report state income taxes and sales taxes. It is not recognized outside of the issuing state. A state tax ID number can also be used to purchase inventory at a discount and with sales tax exemption.

 

Issuing Government Agency

As a federal agency, the IRS issues EINs to businesses and these numbers can be used anywhere in the country for the life of the business (unless one of the changes under Replacing an EIN occurs). On the other hand, state tax ID numbers are issued by the state’s revenue department in the state where the business is located. If a business relocates to another state, a new state tax ID is required.

 

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Final Thoughts

When it comes to Federal Tax ID numbers (EINs), not all business structures are legally required to obtain one. Having an EIN, however, is still beneficial for the reasons stated above. If you still decide not to get an EIN at the outset of establishing your business, you’ll be required to obtain one if you later engage in any of the activities listed under “Who Needs a Federal Tax ID Number (EIN)?”

If you don’t have employees and don’t engage in retail sales, your state may not require you to obtain a state tax ID number. Some states require all businesses to have state tax ID numbers, so check with your state taxing authority or consult with an attorney specializing in business law.

If you engage in retail sales and your state doesn’t require a state tax ID number, it’s still a good idea to obtain one. It’ll allow you to buy inventory or raw materials at a discount and without paying sales tax. You can pass this savings on to your customers which will hopefully lead to a boost in sales.

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