If you own a business; clients, vendors, and banks may ask for your tax identification number so that they can report what they pay you to the IRS, complete other tax forms, or check your identity. For sole proprietors, this often means giving them your Social Security Number (SSN). With data breaches on the rise, giving out your SSN to potentially dozens of businesses, even if they are legitimate, greatly increases your risk of identity theft. To protect yourself, use an Employer Identification Number (EIN) instead.
What an EIN is and What it Does
An EIN is a nine-digit tax identification number assigned to businesses by the IRS. You can use it in place of your SSN on tax forms and other documents related to your business. It’s similar to how some credit card companies let you generate a second credit card number to use for online purchases.
Unlike your SSN, your EIN isn’t directly linked to your personal credit and finances. It is much harder for someone who has stolen your EIN to open credit cards and bank accounts in your name than it would be if they had your SSN. This greatly reduces your risk of identity theft and the possible impact to you.
What an EIN Doesn’t Do
An EIN is just an identification number that sole proprietors can use in place of their SSN and that acts as the only identification number for other types of businesses such as corporations and LLCs. Even when you are required to have an EIN, it doesn’t change your business’s legal status.
If you’re seeking additional protections, such as avoiding personal liability for business debts, you may wish to form a corporation or LLC. The law gives owners of these businesses certain rights that in many cases make it more beneficial to operate as a corporation or LLC rather than as a partnership or sole proprietorship.
How to Get an EIN
You can apply for an EIN online in minutes by filling out a form directly on the IRS website. This is a quick administrative process that by itself has little chance of impacting your legal rights. However, you may wish to talk to a lawyer about the reasons you’re requesting an EIN. For example, if you’re requesting one for payroll tax purposes, you might want to ask your lawyer to review if you’re in full compliance with state and federal tax reporting requirements and other applicable employment laws.
To learn more about whether obtaining an EIN will help you meet your goals or about forming a corporation or LLC, contact our office today.