One of the first questions start up businesses have is
“How do I get an EIN?”
Before we look at the how to get this magic number, you need to make sure you really need one.
If you have a sole proprietorship, with no employees, you do not need an EIN. The Federal Employer Identification Number, or EIN, is an IRS reference number for your business. As a sole proprietorship, your Social Security Number is the only number you need. You do not need an EIN until you hire your first employee.
Remember, your states and cities have their own requirements for business licenses, so you need to check with your state and city agencies to determine whether you need a business license in your area. The requirements in each state vary widely, from paying a small fee, to requiring testing, insurance and bonding, depending on the type of your business, entity, or your level of activity.
If you have a partnership, corporation, LLC, or plan on hiring employees, you need to apply for a Federal EIN. For business entities other than sole proprietorships, your Federal EIN acts like a Social Security number for your business entity. Banks require a Federal EIN to open a bank account, and your vendors may require you to give them this number for Form 1099 reference purposes.
Your business entity only needs one EIN. Your company may operate multiple business entities under different dba (doing business as) names, but each legal entity should only apply for an EIN one time. Even if you change the type of tax return you file, if you have an LLC, you should still use your original EIN. The only time you should apply for a new number is when your business changes ownership, either through incorporating a sole proprietorship or changing from a sole proprietorship to a partnership.
The Federal EIN is also used for trusts, pension plans, state or local tax agencies, withholding agents, associations, etc. This causes confusion, as the application form to get an EIN is designed to cover all of these different situations. Do not be surprised if there are questions or references on the form that do not apply to your business.
Acquiring an EIN is actually a much easier process now than it was just a few short years ago. The IRS has an online application available, allowing you to get your own Employer Identification Number 24 hours a day, seven days a week.
You can also apply for an EIN by mail, fax, or telephone (1-800-829-4933). Whichever format you use, the process uses one form, the SS-4.
You can get a copy of the Form SS-4 on the Internal Revenue Service website, www.irs.gov. Detailed instructions are also available on the IRS website.
If you have employees, and have paid wages, or will soon, you need to make getting an EIN a number one priority. The penalties for depositing payroll taxes are substantial, and you should do your best to avoid these at all costs. They range from 2% of the tax due if the deposit is just one day late, up to 10%, if you are 16 or more days late. You can also be subject to even more late penalties if the taxes are not paid by the due date of the return.
Obviously, the IRS considers timely depositing payroll taxes extremely important, but actually getting the money to the IRS can be a complicated process if you do not have your EIN.
You can deposits payroll taxes two ways, electronically through the EFTPS system, or by check through your local bank. You must either have your electronic account set up, or have a deposit coupon to make a payment at your bank.
Since January, 2004, the IRS has automatically enrolled businesses who apply for an EIN in their EFTPS program. You will receive your enrollment information and PIN number by mail. You have to complete the process by providing company bank account information to the IRS in order to make deposits.
If you ask the IRS to verify your bank account information, be aware that the enrollment process can be delayed by up to six days. Keep this in mind if you are getting close to the due date for your tax deposits.
The IRS no longer automatically supplies Form 8109 yellow coupon books to new EIN applicants. Coupons are required for your bank to process your payroll tax deposits. If you want to pay by check and coupon, you need to call the IRS at 1-800-829-4933 to request a coupon book. It can take 5 to 6 weeks to receive your deposit coupons. They will send you one coupon with your acceptance letter within two weeks of applying for your EIN.
Companies with large payroll tax deposits are required to use the EFTPS system, but I recommend you order a coupon book as a backup, if you are not required to deposit electronically. Why? Well, EFTPS deposits must be initiated the day before the taxes are due, while bank deposits can be timely made on the due date. You can save yourself a tax penalty by depositing your taxes directly at the bank if you happen to forget to initiate the transfer the day before.
If you are in a real bind, and have access to a local IRS office, you can go in and get a Form 8109-B. This is a blank deposit coupon, and allows you to fill in your EIN and business information on the blank form. You can use this to make a deposit at your bank if you are still waiting for your printed coupon book.
Be aware that the IRS really does not like you to use these blank forms, so they tend to only give you one or two forms at a time. Order your coupon book or finalize your EFTPS enrollment as soon as possible, to avoid frustration. They do want your money-they just want you to pay the right way!
Don’t waste your company resources on payroll tax deposit penalties. Get your EIN now!