Do Sole Proprietors Need an EIN?
Sole proprietorships are one of the easiest types of business entities. They are quick and easy to form, cost very little to maintain and administer, and provide simplicity when filing taxes. The great part is that you alone have all the decision-making power and the sole responsibility for the business. Sole proprietorships have many benefits as well as a few drawbacks.
One of the questions frequently posed when establishing a sole proprietorship is, “Does a sole proprietorship need an EIN?” Although many sole proprietorships are not required by law to have an EIN, there are many advantages to having one.
What is an EIN?
An employer identification number (EIN) is a unique ID number issued to a business by the IRS. Companies use their EIN when paying employees, filing taxes, and opening bank accounts. It is similar to a Social Security number for individuals. Sometimes, an EIN is called a taxpayer identification number (TIN).
When an EIN is Required for Sole Proprietorships
Although, as a basic rule, sole proprietorships are not legally required to file for an EIN, there are some circumstances where a sole proprietorship must have one. Those instances are detailed below:
- Hiring Employees
As a sole proprietorship, you must have an EIN to report payroll and unemployment taxes whenever you hire employees.
- Your Company is Tax Exempt
If your company qualifies for tax-exempt status, you must have an EIN to report your income and expenses and file tax returns.
- Change Your Business Structure
If you change your business structure to an LLC or corporation, you must apply for an EIN.
- Filing Pension or Excise Tax Returns
If you file pension or excise tax returns as part of your business, you must have an EIN to use when filing.
- Buying or Inheriting an Existing Business
If you buy or inherit an existing business you plan to run as a sole proprietorship, you must get an EIN.
- Filing for Bankruptcy
If you declare bankruptcy (Chapter 7 or Chapter 11), you must have an EIN.
- Form a Partnership
If you form a partnership from your sole proprietorship, you must apply for an EIN.
- Work with Nonprofits
Nonprofits require an EIN to file their taxes and maintain their tax-exempt status, and they require sole proprietorships that they work with to have an EIN.
- Apply for Business Licenses
Applying for business licenses in your chosen industry may also require you to have an EIN.
- Have a Keogh Plan or Solo 401(k) Retirement Plan
If your company has a retirement plan, you will need an EIN.
- Open a Business Bank Account
When opening a business bank account, the financial institution will require you to have an EIN.
- Establish Credit
You cannot establish business credit without an EIN.
What Types of Businesses Don’t Need an EIN?
Some sole proprietorships and many single-member LLCs don’t need an EIN. If you start your own business (not purchase an existing one) or will never hire employees, you may not need an EIN. Review the list of requirements above, and if you are sure none of those will ever apply to you, you may not need to apply for an EIN.
Keep in mind that you cannot change your sole proprietorship to another type of entity, like an LLC, partnership, or corporation, later without an EIN. Some sole proprietorships have run their businesses using only their Social Security number for many years.
Benefits of Getting an EIN as a Sole Proprietor
Even if you aren’t legally required to get an EIN, there are many reasons to get one anyway. An EIN is an official ID with the federal government that can help protect your company and pave the way for growth later. Some of the benefits of getting an EIN as a sole proprietor are:
- Protect Against Identity Theft
Most sole proprietorships must provide their clients with an ID number (usually your Social Security number) so they can issue a 1099 at tax time for the revenue they paid you. The problem with giving out your SSN is that it opens you up to identity theft. You have no idea how or where your clients store your personal information, including your Social Security number. If stored online, it could be subject to a hack and then find its way to the dark web. Having an EIN protects your SSN, and you can give clients your business ID and keep your personal information safe.
- Separate Business and Personal Finances
It’s always a good idea to separate your business and personal finances, especially at tax time. If you are ever audited, you want to be able to clearly show that the business income and expenses were separate from your own personal accounts. Having an EIN allows you to open a business bank account and easily keep everything separate.
- Legitimize Operations
For sole proprietorships that work out of their home, you can deduct certain expenses like a “home office deduction,” but only if you have an EIN. The IRS sees businesses that operate with an EIN as a legitimate operation. Your clients may also view you as more credible and reliable if you have an EIN. Another important distinction is that an EIN helps delineate you as a contractor, not an employee.
- Prepare for Business Growth
If you ever plan on growing large enough to have employees, you will need an EIN. Most banks will also require that you have an EIN to open a business checking account. You may only be able to get loans and apply for financing with an EIN as well.
- Establish Business Credit
An EIN allows you to establish business credit that is separate from your personal credit. This could help immensely when you need financing or loans.
- Non-US Entity
If you are a sole proprietorship working outside of the U.S. and have no Social Security number, an EIN can help you in many ways. You will need some type of business ID to conduct business in the United States.
- Comply with State Rules
Business formation is done at the state level. Some states require an EIN for you to operate legally within the jurisdiction. Check with your state before deciding whether or not to get an EIN.
How to Get an EIN as a Sole Proprietorship
Applying for an EIN is easy; you can use two methods to obtain one. 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). You can 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. 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 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 done, you can download and print your confirmation letter with your EIN.
The online application option is the fastest way to get your EIN. Fax is the second quickest, and if you apply by mail, you may have to wait up to four weeks to receive your confirmation letter with EIN.
What Information is Required for an EIN?
When applying for an EIN, you must provide the IRS with detailed and specific information about yourself and your business.
- 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
FAQs
There is no downside to having an EIN. You don’t have to use it, but it’s always there if you do. If you really want to get rid of it, you can contact the IRS to cancel the number, and they will remove it from their files.
Some banks may allow you to open a simple business account with your Social Security number, but most won’t. Having an EIN is beneficial and gives you more options than operating off your Social Security number.
You can in many instances. However, giving out your Social Security number can put you at risk of identity theft and fraud. An EIN protects you and represents your business while keeping your personal ID safe.
It depends on the route you take. If you apply online, you can get your EIN almost instantly, within a few minutes or hours. If you apply by fax, you could have it within four business days. If you take the mail route, you may have to wait up to four weeks.
No EINs are free to obtain. The IRS does not charge you for an EIN. However, your EIN can be very beneficial and allow you to open a business bank account.
Typically, a sole proprietorship does not need an EIN unless you plan on hiring employees, having a retirement plan, filing excise taxes, or filing for bankruptcy. Although you don’t need one, you should consider all the benefits you get from applying for an EIN. Deciding to get an EIN is a personal decision.
Typically, sole proprietorships do not receive a 1099-NEC. However, some clients may provide you with one if you give them your EIN before starting work.
Yes, technically, you can run a successful business without an EIN. However, the benefits far outweigh any negatives, and it doesn’t hurt to have one if you ever need it.
No law states that a sole proprietorship must have a business bank account. You could run the entire thing out of your personal bank account. However, experts highly recommend getting an EIN and opening a business bank account to keep things separate and avoid any legal issues.
As a sole proprietor, you pay yourself through an "owner's draw," which is essentially taking money from your business account for your personal use. You can write yourself a check or transfer money electronically from your business account to your personal account; either way is fine. It is not considered a salary or subject to payroll taxes. Since the IRS considers any withdrawals from your business as your personal income, you must pay income taxes on them when you file at the end of the year.