Once you establish your freelance business, you’ll be eligible to receive what’s known as an EIN, which stands for Employer Identification Number.
This nine-digit number, which is sometimes also referred to as a Federal Tax Identification Number, is assigned to businesses by the IRS, and it’s used it for tax filing and reporting purposes.
To boil it all down, your EIN is like a Social Security number for your business. And it’s formatted like this: 12-3456789.
After obtaining your EIN, you’ll be able to list it on every form, payment, and document that your business files with the IRS. And, in most states, including California, you’ll also use the EIN for state tax filings and payments.
As you read through the article on EINs below, please keep in mind that, although we’ve made every effort to ensure that this information is accurate, it doesn’t constitute legal advice, nor is it a substitute for legal advice. You should always consult with your attorney for personalized guidance.
Why Is It Important to Obtain an EIN?
There are a couple of big reasons why it’s important to get an EIN for your LLC:
- First off, the IRS works hard, processing hundreds of millions of tax filings and payments annually. Pretty mind-boggling, right? So you want to be absolutely sure that the IRS will be able to accurately track, and account for, all of your LLC’s payments and filings.
Your EIN will be the tool that the IRS can use for tracking purposes. Therefore, complying with EIN rules, and using your EIN whenever you need to identify your business, is imperative.
Trust us, there’s nothing worse than having the IRS tell you that they’ve never heard of your business or that they haven’t received payments you’ve made. Yikes!
- Secondly, even though most businesses obtain an EIN even if they don’t have any employees, getting an EIN will be absolutely necessary if you want to hire employees who will work for you.
Without an EIN, you won’t be able to withhold taxes from employees’ pay, and you won’t be able to file employment tax returns.
What’s the big deal? Well, failing to do all of that can result in severe IRS penalties. You certainly don’t want that!
When Is an EIN Required?
Are you forming a business that will be legally separate from yourself? Then you’ll need to get your EIN, plain and simple.
So, if you’re forming a corporation, a partnership, or an LLC (including one with multiple owners), you’ll have to take the time to get an EIN. And if you’re the co-owner of a multi-member LLC that ends up changing over to a single-member LLC, you’ll need to get a new EIN.
But what if you’re a sole proprietor? Well, the rules are a bit different because you’re running a one-person business and you haven’t formed a separate business entity. In that case, subject to some important exceptions, you can use your personal Social Security number to identify your business. Translation: you don’t have to get an EIN.
The sole proprietor rules also apply if you’ve formed a single-member LLC (SMLLC) and it isn’t going to be taxed as a corporation. Your SMLLC, also known as a “disregarded entity,” will be treated the same as a sole proprietorship for tax purposes.
Here’s when you’d need to obtain an EIN if you’re a sole proprietor:
- You hire employees
- You buy or inherit an existing business that you operate as a sole proprietorship
- You incorporate your sole proprietor business, or you form a partnership or a multi-member LLC
- You file for bankruptcy (your bankruptcy estate must obtain an EIN for its tax filings)
Here’s when you’d need to obtain an EIN if you’re the owner of an SMLLC taxed as a sole proprietorship:
-You hire employees
– You add one or more additional members to your SMLLC
– You elect to have your SMLLC taxed as a corporation
Note: Whether or not you plan on hiring employees, be sure to get your EIN soon after completing the business formation process.
Should You Obtain an EIN Even If It Isn’t Required?
Let’s say that you’re in a position in which you’re a sole proprietor or the owner of an SMLLC and you can use your Social Security number, rather than an EIN. Should you still bother getting an EIN, just in case?
The truth is that millions of people who operate as sole proprietors and SMLLC owners do just fine using their Social Security number.
But, here’s something to consider: if you’re a sole proprietor or an SMLLC owner, you do still have the option of getting an EIN, even though you aren’t required to do so. The great thing about taking this route is the fact that you can avoid using your Social Security number to identify your business.
Why is avoiding the use of your Social Security number—and using an EIN instead—beneficial?
An EIN Can Help You Avoid Identity Theft
Identity theft is a huge—and unnervingly common—problem.
It should come as no surprise that keeping your personal Social Security number as private as possible is imperative. But if you’re operating as a sole proprietor or SMLLC owner without an EIN and you end up getting paid more than $600 for your products and/or services within a year, you’ll need to provide your Social Security number to clients.
On the other hand, if you have an EIN, you can avoid providing your Social Security number to members of the public, including your clients and customers. Definitely helpful when it comes to protecting your personal identity!
An EIN Can Help Establish Your Independent Contractor Status
When you use an EIN on your tax returns and payments, it helps prove that you’re an independent businessperson.
Put simply, your EIN will demonstrate that you aren’t an employee; you’re an independent contractor. And that could actually make you more attractive to prospective clients!
An EIN Can Help Establish Your LLC as a Separate Entity
If you decided to form an SMLLC, you likely did so to avoid being held personally liable for your business’s debts and lawsuits. Smart move! But you could go a step further and get an EIN, which will make it abundantly clear that your LLC is separate from you personally.
Using an EIN in place of your Social Security number when you need to identify your business will help establish your LLC as a legitimate entity, and doing so will help prevent you from being held liable for any of your LLC’s debts. After all, that’s why you formed your LLC, right?
Banks Might Require an EIN If You’re an SMLLC
When you’re working as a sole proprietor, opening a business bank account using your Social Security number is possible. However, if you’ve formed an SMLLC, some banks might require an EIN prior to establishing an account in your business’s name.
This isn’t actually a legal requirement; it’s just a policy that a lot of banks choose to enforce. And it’s important to keep in mind that this is the case even if your SMLLC is taxed as a sole proprietorship.
What Are the Steps to Obtaining an EIN?
By now, you might be wondering: is obtaining an EIN free? Absolutely!
Simply apply for your EIN soon after your LLC is legally formed or your sole proprietorship business is up and running. And once you officially have your EIN, you can start using it right away.
One way to obtain an EIN is by applying directly through the IRS website. Fill out the application online, pass the system’s automatic validity check, and get your EIN. Just be sure to print out a copy of the confirmation notice, and keep it for your records. If you don’t want to apply online, you could instead complete and file IRS Form SS-4 (Application for Employer Identification Number).
But, to make your life super simple, you could sign up for a Hyke account and let us do all of the work for you, from filing documents that will legally form your LLC, to submitting the right form to get your EIN immediately.
Here’s something to consider: there are quite a few questions that you’ll need to answer when filing for an EIN. These questions include:
- How many member(s) are in your LLC?
- Who is the Responsible Party of the LLC?
- What is the legal name of the LLC?
- What is the trade name/“doing business as” name?
- What does your business or organization do?
Plus, on top of answering all of those questions, you’ll need to describe your employees. Wow, that’s a lot, and it could be time-consuming and confusing!
If you feel the stress building up just thinking about all of the information you’ll need to provide, and if you’re at all worried about filling everything out correctly and accurately, Hyke can help make getting your EIN easy!
Ready to Obtain Your EIN?
It’s clear that an EIN can really be an asset when it comes to running your company in a smart, secure, and professional manner. And the best part is that, with a Hyke account, you don’t even have to worry about the process because obtaining your EIN is just part of the perks that you can receive when you let us help you set up and manage your freelance business.
So, what are you waiting for? Are you ready to get your EIN and take the next step as a successful business owner? Contact us today to get started!
Stephen has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.