Understanding Sole Proprietorship EIN

Starting an unincorporated business all by yourself allows you to exercise control over everything and be responsible for your business. A sole proprietorship is where one person owns and runs a business and is also responsible for their taxes, profits (or losses), and debts.

It is one of the most basic and uncomplicated business structures. But, even with its simplicity, there are some administrative responsibilities you should be aware of. One of them is getting an Employer Identification Number (EIN).

An EIN is a valuable asset for any business — even if you’re not legally required to have one. There are a variety of advantages of obtaining a sole proprietor EIN, you can file tax returns, recruit staff, and build business credit.

In the sections that follow, we will explore the ins and outs of a sole proprietorship EIN, why it matters, how to get one, and more.

What is an Employer Identification Number (EIN)?

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An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is a unique nine-digit code assigned to businesses by the Internal Revenue Service (IRS). Think of it as a social security number for your business. Just as an individual needs an SSN to identify themselves for tax and financial purposes, a sole proprietor may need an EIN for similar reasons.

Does a Sole Proprietor Need an EIN?

Sole proprietors don’t need an EIN unless they have employees. In other words, you do not require an EIN if you are the only one working at your company. However, without an EIN, you won't be able to 

• start a new company, 
• inherit an existing business, 
• enter into a business partnership or form a limited liability company.

Hence, getting an EIN number might be a wise decision.

The IRS website makes it quick and easy to obtain an EIN, so even if a sole proprietor does not require one, it could be a good idea to do so. 

Let's look at a few scenarios where sole proprietors might need an EIN.

Hiring Employees

An EIN is required if your sole proprietorship is starting to hire employees. This number is used for tax withholding, reporting, and other employment-related matters. It makes sure that the tax responsibilities of your employees are appropriately fulfilled while streamlining the procedure.

Opening a Business Bank Account

It's critical to keep your personal and professional funds separate. Having a sole proprietorship EIN makes it possible for you to create a business bank account, which not only simplifies financial administration faster but also gives your company legitimacy with customers and business partners.

Privacy Protection

You can boost privacy in your business operations by using a sole proprietorship EIN rather than your Social Security Number. Sharing your EIN instead of your SSN with customers, suppliers, and business partners also reduces the risk of identity theft.

Considerations for International Business

To guarantee accurate personal and business taxes reporting and compliance with IRS requirements, an EIN might become necessary if your sole proprietorship engages in a foreign business or employs non-residents.

When is an EIN Required for a Sole Proprietor?

As a sole proprietor, obtaining an EIN is not mandatory, but it can still be advantageous. Here's a rundown of situations where getting an EIN is typically necessary:

Employing People: In order to manage payroll taxes and other employment-related tax requirements, you will need an EIN if you decide to employ individuals, including domestic workers like independent contractors or full-time employees.

Operating as a Corporation or Partnership: An EIN is necessary if your company structure changes to a corporation or partnership. It is also necessary in order to file taxes.

Withholding Taxes on Business Income Other Than Wages: An EIN is required if you have to deduct taxes from any business income that is paid to a non-resident alien.

Operating a Keogh Plan: Getting an EIN becomes a crucial step in your goal of safeguarding your finances. Especially if you are eligible for a specialized retirement plan known as a Keogh plan. 

The Keogh plan, additionally referred to as an H.R.10 plan, aims to make it easier for unincorporated businesses and self-employed people to establish savings for retirement. An EIN is necessary to run this plan properly. By obtaining an EIN for your Keogh plan, you make it obvious where your personal finances end and your retirement savings begin. This ensures that the advantages of the plan are maximized and that you continue to comply with all applicable tax laws.

How Do You Apply for an EIN?

You can apply for an EIN online through the IRS website – the process is simple and takes just a few minutes. You’ll need to provide some basic information about your business, such as the name and address, trade name, as well as your Social Security number. However, check your employment status before applying.

Online Application

The IRS's online application process is the quickest and most efficient method to apply for an EIN. Businesses in the United States and its territories can use this process. Here, you are guided through an array of questions on the online application to confirm your eligibility for an EIN.

Applying via Fax or Mail

If an online application isn't an option, you can complete Form SS-4 to apply for Employer Identification Number. The relevant IRS office can then receive the paperwork through fax or mail. Even though it takes a little bit longer than an online application, this is a more reliable approach.

International Applicants

The Form SS-4 can also be used by international applicants, including those living outside the United States, to get an EIN. The procedure could differ slightly depending on your location and the IRS office that handles overseas applications.

Utilizing Third-Party Services

For a fee, several third-party companies help with the EIN application process. Even while using these services might simplify the procedure, use caution and ensure that you collaborate with a reliable company to prevent overspending or potential fraud.

Other Reasons to Get an EIN

The benefits of EIN for sole proprietors are tremendous. While the scenarios mentioned earlier highlight when an EIN is required, there are instances where it's beneficial, even if not obligatory.

Establish Business Credit

Obtaining an EIN helps to establish business credit history for your company. A distinct business credit profile makes getting loans and other financial resources easier as your company grows and prospers. This is crucial for creating a solid financial foundation. 

An EIN is essential in this process as lenders and other financial institutions often evaluate the creditworthiness of the business based on its credit history.

Legal Requirements

While not all sole proprietorships may be mandated by the Internal Revenue Service (IRS) to obtain an EIN, there are some situations when state and municipal authorities insist on having one. For licensing and regulatory purposes, certain cities and states want an EIN. Therefore, knowing your local legal requirements is crucial to ensuring smooth business operations, even if the IRS doesn't need it.

Credibility

Beyond the above advantages, an EIN can significantly enhance your business's credibility. When clients and business partners see that you possess an EIN, it conveys professionalism and solidity. It shows your business is established, legitimate, and committed to proper administrative procedures. This perception can cultivate trust and confidence among your stakeholders, leading to better partnerships and customer relations.

How Can Skuad Help?

While a sole proprietorship might be the simplest form of business ownership, it still involves important administrative tasks like obtaining an EIN. Whether you're looking to hire employees globally as a sole proprietor, establish a separate credit history, or protect your privacy, an EIN offers numerous advantages.  

To expand your business across borders, partner with an EOR platform. Skuad is a trusted EOR (employer of record) platform that can simplify all processes related to global payroll and tax compliance. With our unified platform, you also get seamless onboarding and international hiring. Book a demo today!

FAQs

What are the benefits of getting an EIN?

The benefits of getting an EIN include

• Privacy protection.
• Easier to hire employees
• Qualification for a corporate bank account.
• Simplicity of foreign transactions.

As a sole proprietor, is my EIN linked to my SSN?

No, your EIN and SSN (Social Security Number) differ. By keeping them apart, you can protect your identity while conducting business.

What business does not need an EIN?

An EIN may not be necessary for sole proprietors who have no employees and are not engaged in regulated activities like the sale of alcohol, tobacco, or firearms. Additionally, companies exempt from municipal or state rules may not require one.