Do I Need A Tax ID Number To Start A Business?
Considering starting your own business? First of all, congrats! Whether you’re opening an online store, freelancing, or starting a side hustle, stepping into entrepreneurship is a bold and exciting move. But as you dive into planning, branding, and maybe even designing your logo, there’s one question that often pops up:
Do I Require Tax ID Number to Establish a Business?
Short answer? Yes, in the greatest majority of cases. But it depends on the type of business you’re starting, where you’re located, and how you plan to operate. Together, it can be broken down.
So What Is Tax ID Number?
But just what in the world is a Tax ID Number? Let us clarify that first. In the U.S, it has a couple of variations, although the two most popular are:
- EIN (Employer Identification Number): issued by the IRS, used primarily by businesses
- ITIN (Individual Taxpayer Identification Number): issued to individuals who need a U.S. tax ID but aren’t eligible for a Social Security Number
If you’re a U.S. citizen starting a business, you’ll likely be looking at an EIN. However, in case you are a non-citizen or you do not qualify to get a Social Security Number, you might require an ITIN.
Not sure which of those is applicable to you? You are not the only one. Many new business owners aren’t sure where they fall in the ITIN vs EIN discussion.
Are Sole Proprietors Always Necessary?
Not always. If you’re a sole proprietor (meaning you’re working under your own name without employees), you might be able to use your Social Security Number for tax purposes instead of getting a separate EIN. However, this is where it becomes tricky…
Would you like to open a business bank-account? Submit an application to business credit? Collaborate with particular suppliers or channels? EIN will be needed by most of them- even when you are a one person show. It adds credibility, helps protect your identity, and keeps your personal and business finances separate (which is a lifesaver come tax season).
What If I am Not a U.S. Citizen?
Here’s where the ITIN vs EIN question becomes even more relevant.
Whether you are a non-resident and are interested in opening a business in the United States or earning income there, you will have to have a means of filing taxes. ITINs are where it comes in. With an ITIN, you can comply with tax requirements, however, this does not necessarily mean that you can employ workers and have a complete business setup.
On its part, EIN is utilized in registering businesses, despite the owner being a non-U.S. resident. The answer is, yes, even foreign founders can receive an EIN form the IRS and establish a valid business presence in the States. Cool, right?
But here’s the kicker: you might need an ITIN and an EIN depending on your setup.
In Which Cases Is EIN Definitely Required?
The following is a fast list of the instances when you need to obtain an EIN:
- You are going to employ workers
- You are making an LLC or corporation
- You re opening a business bank account
- You desire to established business credit
- You are making some federal tax returns
- You are dealing with clients that require a W-9 form
Essentially, as long as you are expanding beyond a side hustle, it is a good idea to obtain an EIN.
How Do You Receive One?
Applying or obtaining an EIN is fairly easy. You may apply free of charge at the IRS site. One does not have to pay the third party services (unless one needs additional assistance with paperwork). The process takes about 15 minutes, and you’ll get your EIN immediately after submitting the online form (if you’re eligible).
In the case of ITINs, the procedure is somewhat complicated. You will be required to apply using Form W-7 and submit evidence, and you may have to use a Certified Acceptance Agent. It requires more time but it can be done with a modicum of patience.
Final Thoughts
Launching a business is thrilling, but dealing with tax matters can certainly put a damper in your pace. What is the good news? Once you figure out where you land on the ITIN and EIN scale, the rest becomes a lot more manageable.
The answer to the question, do you need a tax ID number to start a business, is no. The chances are, yes. Nevertheless, do not allow that to dishearten you, as it is a required measure that will lead to additional opportunities, legal safeguards, and future development.
And believe us that it is so much simpler to organize your paperwork well in advance than it is to panic when tax time comes into view.
