As a new business owner, you might heard of the necessity of obtaining FEIN to run your business.
FEIN stands for Federal Employer Identification Number. Some employers view it as a Social Security Number (SSN) or a tax ID for their business. However, not all types of businesses are required to have one as one-person businesses can use their SSN as their FEIN.
Let’s see more details.
What is a FEIN?
A FEIN is a distinctive nine-digit number given by the Internal Revenue Service (IRS) to recognize businesses operating within the United States.
Think of it as a SSN, but for your business. Just as your SSN is used to track your personal taxes and financial activities, the FEIN is used to track your business’s tax obligations and financial transactions.
The FEIN is also known as an Employer Identification Number (EIN) or Federal Tax Identification Number. Regardless of the name, they all refer to the same thing—a number that helps identify your business for federal tax purposes.
How Does a FEIN Work?
The FEIN is tied directly to your business and remains with it for its entire existence unless there are significant changes, such as ownership changes or restructuring into a different type of entity.
It’s used by the IRS to process tax returns, track payroll taxes, and monitor other financial activities related to your business.
For example:
- If you file taxes for your business, you’ll need to include your FEIN on the forms.
- If you pay employees, you’ll use your FEIN to report payroll taxes.
- If you open a business bank account or apply for credit, lenders and banks will use your FEIN to verify your business identity.
The FEIN simplifies many processes by giving your business a unique identifier that separates it from others.
Why is a FEIN Important?
The importance of a FEIN cannot be overstated. It serves as more than just an identifier, it’s a critical tool that helps businesses comply with legal requirements and operate efficiently. Here are some key reasons why having a FEIN is essential:
1. Easier Tax Filing
When it comes to filing taxes, having a FEIN simplifies the process. Instead of using your personal Social Security Number (SSN), you can use your FEIN to file federal, state, and local taxes. This separation makes it easier to track your business’s financial activities and reduces the risk of errors.
Additionally, if you have employees, a FEIN is required to report payroll taxes and issue W-2 forms at the end of the year.
For businesses that need to file excise taxes or other specialized tax forms, having a FEIN is essential. It ensures that the IRS can properly identify your business and process your tax filings without confusion.
2. Enhanced Professional Image
A FEIN can make your business appear more professional and legitimate in the eyes of customers, vendors, and financial institutions. For example:
- When opening accounts with suppliers or wholesalers, they may request a FEIN as part of their onboarding process.
- Clients may feel more confident working with a business that has an official tax ID rather than one that operates solely under an individual’s SSN.
3. Hire Employees
If you plan to hire employees, having a FEIN is mandatory. You’ll use it to report wages paid to employees and withhold payroll taxes such as Social Security and Medicare. The IRS requires employers to have an EIN before they can legally hire workers.
4. Open Business Bank Accounts
Most banks require businesses to have a FEIN before they can open a business checking or savings account. It helps separate your personal finances from your business finances, which is a necessary step in managing money effectively.
5. Streamlined Loan Approvals
If you ever need to apply for a business loan or line of credit, having a FEIN is often a requirement. Lenders use this number to check your business’s credit history and verify its legitimacy. Without a FEIN, you may face delays or even rejection when applying for financial support.
6. Protect Personal Identity
Using an EIN instead of your Social Security Number in business transactions reduces the risk of identity theft. So as you can see, it creates a layer of separation between your personal identity and your business activities.
7. Legal Requirements
Some states and local governments require businesses to have an EIN for licensing or permitting purposes. Additionally, certain types of businesses, such as corporations or partnerships, are required by law to obtain one.
Who Needs a FEIN?
As said before, not every business owner needs a FEIN, but many do. The IRS has specific rules about which types of businesses are required to obtain one. Let’s break this down so you can determine whether your business needs one:
Businesses That Must Have a FEIN
You are required to get a FEIN if:
- Your business operates as a corporation or partnership.
- You hire employees.
- You file certain tax returns like employment taxes or excise taxes.
- You withhold income taxes on payments made to non-resident aliens.
- Your business has a Keogh retirement plan.
- You’re involved in specific types of organizations such as trusts, estates, nonprofits, or farmers’ cooperatives.
When Sole Proprietors Need One
Sole proprietors are not always required to have an EIN because they can use their Social Security Number for tax purposes if they don’t hire employees or file specific tax returns. However, even sole proprietors may benefit from getting one if they:
- Want to open a separate bank account for their business.
- Plan to apply for loans or credit under their business name.
- Want added privacy by avoiding the use of their Social Security Number in public documents.
When You Don’t Need One
If you’re operating as an independent contractor without employees or running a small side hustle without formalizing it into an LLC or corporation, you might not need an EIN. However, even in these cases, having one can still provide advantages like building credibility with clients or vendors.
How to Apply for a FEIN
Here are the steps to applying for a FEIN:
Step 1: Determine Eligibility
Before applying for a FEIN, make sure you meet the eligibility requirements:
- Your principal place of business must be located in the United States or U.S. territories.
- You must have a valid taxpayer identification number (such as an SSN) to apply.
If you meet these criteria, you’re ready to move forward.
Step 2: Complete Form SS-4
Form SS-4 is used by the IRS to collect information about your business and its responsible party (the person in charge). The form asks for details like:
- Your legal name or the name of your entity.
- Your trade name (if different).
- The type of entity (e.g., sole proprietorship, LLC).
- The reason for applying (e.g., starting a new business).
You can find Form SS-4 on the IRS website.
Step 3: Submit Your Application
You have several options when submitting your application:
- Online: This is the fastest method—you’ll receive your EIN immediately after completing the application.
- By Mail: Send Form SS-4 via mail if you prefer paper submissions; processing takes about four weeks.
- By Fax: Faxing Form SS-4 speeds up processing compared to mailing; expect results within four days.
- By Phone: International applicants can apply by calling the IRS directly.
Once approved, you’ll receive confirmation with your new EIN/FEIN number.
When Should You Apply for a New FEIN?
Your existing FEIN remains valid unless there are significant changes in how your business operates. However, there are situations where applying for a new FEIN becomes necessary:
Situations Requiring a New FEIN
- Changing Ownership: If ownership transfers from one individual or entity to another.
- Restructuring: For example, converting from sole proprietorship into an LLC or corporation.
- Bankruptcy Filing: In some cases involving bankruptcy reorganization under Chapter 11.
- Starting Over: If closing one entity entirely before launching another under different terms/entities.
Minor updates like address/name changes don’t require reapplication!
Common Misunderstandings About FEINs
New business owners often have misconceptions about FEINs, which can lead to confusion or missed opportunities. Let’s address some of the most common misunderstandings:
1. “FEINs Are Only for Big Businesses”
Many people believe that only large corporations need a FEIN. In reality, businesses of all sizes, whether they’re sole proprietors, partnerships, or small LLCs, can benefit from having one. Even if it’s not legally required for your specific business type, obtaining a FEIN can provide advantages like protecting your identity and simplifying tax filings.
2. “FEINs Are the Same as State Tax IDs”
While both numbers are used for tax purposes, they serve different roles:
- A FEIN is issued by the federal government (IRS) and is used for federal tax reporting.
- A State Tax ID is issued by your state government and is used for state-specific taxes like sales tax or state income tax withholding.
Depending on where you operate, you may need both numbers to comply with local laws.
3. “I Don’t Need One If I Don’t Have Employees”
It’s true that businesses without employees aren’t always required to have a FEIN. However, even if you’re running a one-person operation, having a FEIN can still be beneficial. For example:
- It allows you to open a business bank account.
- It helps protect your personal SSN when dealing with clients or vendors.
- It makes it easier to expand in the future if you decide to hire employees or change your business structure.
