Small Business Taxes: Do You Need an Employer Identification Number (EIN)?

If you run a small business or engage in self-employment activities, you may need an Employer Identification Number (EIN) issued by the IRS, whether or not you have employees.

An EIN, also known as a Federal Tax Identification Number, is used to identify a business entity for tax purposes.

How do you know whether you need an EIN? If you answer "Yes" to any of the following questions, you must get one:

1. Do you have employees?
2. Do you operate your business as a corporation or a partnership?
3. Do you file any excise tax returns (such as alcohol, tobacco and firearms)?
4. Do you have a retirement plan known as a Keogh?

So it is possible for you to own a small business or be self-employed and not need an EIN. If you answered all the above questions with a "No", then you are probably a sole proprietor or a self-employed person such as an independent contractor and since none of the conditions above apply, you need not concern yourself with the EIN. If that's your situation, you simply use your Social Security Number as your business tax identification number, and that's just fine with the IRS.

Let's take a closer look at Questions 1 and 2, since it is much more likely that you will answer those questions with a "Yes" than Questions 3 and 4.

Question 1: Are you an employer?
The most common reason for a sole proprietor to need an EIN is because you have employees and are issuing paychecks, withholding payroll taxes (income tax, social security tax, medicare tax), making payroll tax payments, and filing payroll tax returns (such as Form 941 and Form 940).

For EIN purposes, an employee of a sole proprietorship must be someone other than the sole proprietor. The sole proprietor is never considered an employee of the sole proprietorship because the payments you make to yourself out of business profit are not considered wages.

So if you are a sole proprietor and have no one else performing work as an employee for your business, then you have no employees and have no need for an EIN.

Question 2: Are you a corporation or a partnership?
If you ever form a corporation or a partnership, you must get an EIN. But notice that Question 2 makes no mention of the limited liability company (LLC), which has become an increasingly popular choice of entity type.

With a LLC, the rules get tricky, so pay attention here.

Keep in mind that the IRS did not create a new tax classification for the LLC when it was created by the states. The IRS uses the tax entity classifications for the LLC that it has always had for business taxpayers: sole proprietor, C corporation, S corporation, and partnership. For tax purposes, an LLC is always classified by the IRS as one of these types of entities.

If you are a single-member LLC (in LLC lingo, "member" means owner) and choose to be treated for tax purposes as a sole proprietorship, you do not need to get an EIN (unless you answer "Yes" to Questions 1, 3 or 4). But if you are a single-member LLC and choose to be treated for tax purposes as a corporation, then you must get an EIN. And if you are a multi-member LLC, regardless of how you choose to be treated for tax purposes (partnership or corporation), you must get an EIN.

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