EIN vs SSN: What’s the Difference for Sole Proprietors?

When starting a business, you must decide on the type of company structure you want to establish. Your choices include sole proprietorship, partnership, LLC, and different kinds of corporations. Sole proprietorships are the simplest and most affordable business structure, where you are the sole proprietor and work independently. Most companies need an EIN to conduct business; with sole proprietors, it’s a bit more complicated. Let’s take a look at the comparison between EIN vs. SSN and how it works for sole proprietors.

What is an EIN?

An Employer Identification Number (EIN), or Federal Employer Identification Number (FEIN), is a nine-digit number the IRS assigns to your business for tax and other purposes. Your EIN identifies you to the IRS when filing different types of taxes (payroll, income, etc.). Employers, sole proprietors (with employees), corporations, LLCs, partnerships, nonprofits, trusts, estates, government agencies, certain individuals, and others all use EINs. Whenever you contact the IRS, you use your EIN to identify your business, so the correspondence and information are linked to the proper account.

Who Needs an EIN?

Most business types require an EIN. Regardless of whether you structure your company as a sole proprietorship, partnership, limited liability company (LLC), corporation, or nonprofit, you need to apply for and obtain an EIN or FEIN.

There are some exceptions to this rule. Some sole proprietorships and single-member LLCs can do business without an EIN. In these cases, the individual owner will use their Social Security number (SSN) instead when filing taxes and identifying themselves to clients for tax purposes. If you don’t hire employees as a sole proprietorship or single-member LLC and comply with other rules, you don’t need an EIN. However, even if these entities don’t need an EIN, they can still obtain one, and it makes sense to do so; it offers many benefits.

Other Cases Where You Need an EIN

Most businesses need an EIN. Although there are a few exceptions to this rule, most companies will need one because even if they start out small and simple, things may change later. Some of the reasons that a business may require an EIN include:

• Federal Tax Reporting and Compliance

  EINs serve as a business equivalent of a Social Security number, enabling the IRS to identify businesses whenever they file taxes or other tax-related documents. EINs are especially critical for corporations, partnerships, and LLCs, all of which are required to have an EIN for federal income tax purposes, regardless of whether or not they have employees. It is used on various IRS forms, such as Form 941 (Employer's Quarterly Federal Tax Return) and Form W-2 (Wage and Tax Statement).

• Employees

  If a business has employees, an EIN is necessary for managing payroll and withholding and remitting employment taxes (including federal income tax, Social Security, and Medicare contributions).

• Certain Industries

  Businesses involved in certain activities requiring the filing of excise taxes (like those related to alcohol, tobacco, or firearms) also need an EIN.

• Financial and Administrative Tasks

  When you open a business bank account, most banks require an EIN, which is crucial for separating business and personal finances. This can help you avoid issues if you ever get audited.

• Applying for Licenses and Permits

  Many states and local jurisdictions require an EIN for obtaining necessary business licenses and permits.

• Business Credit

  An EIN allows a business to establish its own credit history, separate from the owner's personal credit. This is crucial for obtaining loans, lines of credit, or collaborating with specific vendors.

• Working With Other Organizations

  Some organizations, such as nonprofits, may require an EIN from businesses they work with, particularly for grant applications or financial reporting.

• Retirement Plans

  Certain retirement plans, like Keogh plans, require an EIN for those who are self-employed or operating unincorporated businesses.

• Identity Theft Protection

  By using an EIN instead of a Social Security number (SSN) for business activities, individuals can help protect their personally identifiable information (PII) and reduce the risk of identity theft.

Other situations where you need to have an EIN include:

• Trusts, Individual Retirement Accounts (IRAs), and Tax-Exempt Business Income Tax Returns
• Estates
• Real Estate Mortgage Investment Conduits
• Nonprofit Organizations
• Farmers’ Cooperatives
• Plan Administrators

How to Obtain an EIN

Since most business structures do require an EIN, you should apply for one after registering your company with the Secretary of State. Obtaining an EIN is a relatively simple process. Additionally, applying for an EIN is free; no fees are required.

Obtaining an EIN is easy, and you can use two methods to do so. They are as follows:

• By Mail

  Visit the IRS website and download Form SS-4 and print it out. Complete the form with all the information required (see below). Alternatively, you can mail the form to the IRS using the address printed on the form. You may have to wait a bit longer for your EIN to arrive by mail.

• Online Application

  You may also choose to submit your application to the IRS digitally. Visit the IRS website and fill out all the fields. Once you have completed and submitted the online application, you will immediately receive your new EIN after the IRS validates the information. Validation takes place during the application process. Once complete, you can download and print your confirmation letter, which includes your EIN.

• By Fax

  Visit the IRS website and download form Form SS-4 print it out, and complete it with all the necessary information (see below). Fax your completed form to the number listed on there. If you use fax, the IRS will fax you back a confirmation letter with your new EIN within four business days.

The online application option is by far the fastest way to get your EIN. Fax is the second quickest option, and if you apply by mail, you may have to wait up to four weeks to receive your confirmation letter with your EIN.

What Information is Required for an EIN?

When applying for an EIN/FEIN, you must provide the IRS with detailed and specific information about yourself and your business. Those details are as follows:

• The legal name of your business. If you have registered the sole proprietorship under your name, then you will use that. If you have a trade name, “Doing Business As (DBA)” name, you must include that as well.
• Your business’s legal address, including state and country.
• Your name and tax ID (SSN). As a sole proprietorship, you will have the authority to control and manage the business, funds, and all assets.
• The type of entity (corporation, LLC, sole proprietorship, partnership) and the date you started the business.
• Does your business involve gambling, and do you sell alcohol, tobacco, or firearms?
• You must provide the reason you are applying for an EIN. Some examples are acquiring an existing business, starting a new business, or hiring employees.
• The highest number of employees you expect to hire within the next 12 months. You must also designate when you will pay employment taxes (annually or quarterly) and the first date you paid wages to your staff.

Along with the information above, you must also identify your business type from the list of industries below. Use your best guess if nothing matches up perfectly.

• Accommodation & food service
• Construction
• Manufacturing
• Finance & Insurance
• Healthcare & social assistance
• Retail
• Real estate
• Rental & leasing
• Transportation & warehousing
• Wholesale-agent/broker or Wholesale-other
• Other

What is an SSN?

An SSN or Social Security Number is a unique nine-digit number issued to each U.S. citizen by the government. It serves to track your income and earnings over your lifetime to determine your eligibility for Social Security benefits. The Social Security Administration issues them. Your SSN is your personal federal tax identifier, and you use it to file your income taxes, open bank accounts, get credit, and many other things. To get one, you must file Form SS-5 with the Social Security Administration. When applying, you must supply your original birth certificate or U.S. passport.

Who Needs an SSN?

U.S. citizens, permanent residents, and eligible non-U.S. citizens authorized to work in the country are required to have a Social Security number to get a job, file taxes, and apply for government benefits and services, such as Social Security and Medicare. An SSN is required to open a bank account, apply for credit or a loan, and obtain a passport. Your SSN also serves as a crucial form of identification.

Some out-of-country individuals who are not authorized to work in the U.S. may be exempt from needing an SSN, for example, when they apply for a driver’s license. However, in that case, they may need to obtain an Individual Taxpayer Identification Number (ITIN) instead.

How to Get an SSN

To obtain a Social Security Number (SSN), visit SSA.gov and initiate your application online. You will fill out a Form SS-5. Then, you need to gather documents (birth certificate or birth record, passport, driver’s license, green card, or other official ID) that prove your age, identity, and U.S. citizenship or lawful immigration status. Once you have those, you can visit a local Social Security office within 45 days of starting your online application to complete the process. You will need to set up an appointment, as most offices don’t accept walk-ins.

What is the Difference Between an EIN and an SSN for Sole Proprietors

As a sole proprietor, your Social Security number (SSN) is your individual tax ID for reporting your income and expenses when you file taxes. Your Employer Identification Number (EIN) serves as your business’s unique identifier, which you use to file business taxes and report wages paid to your employees. The EIN helps you build separate business credit, protect your identity from theft, and open business bank accounts.

When Sole Proprietors Need an EIN

Most sole proprietors can use their SSN to file taxes and connect with customers/clients. But there are situations where a sole proprietor needs an EIN, such as:

• When reporting/filing taxes.
• You have employees or plan to in the future.
• Protecting your privacy and identity.
• Establishing independent contractor status.
• You want to build business credibility.
• Building business credit.
• Specific business activities like paying excise or pension taxes.

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