Federal Tax ID Defined:
A federal tax ID number, also referred to as an employer identification number, is a number assigned to an individual’s business by the Internal Revenue Service. The Federal Tax ID number is used to identify an individual’s business; the Federal Tax ID number is offered to several federal agencies that are responsible for the regulation of business practices in the United States.
In essence, the Federal Tax Id number is the corporate equivalent of a Social Security Number. That being said, the Federal Tax ID number can be issued to seemingly everyone, including individuals, who are forced to pay withholding taxes on their employees.
The Federal Tax Id number is typically used by sole proprietorships, employers, partnerships, non-profit organizations, estates, government agencies, trusts, corporations, certain individuals and other forms of business entities.
The Internal Revenue Service uses the Federal Tax ID number to identify all taxpayers that are required to file business tax returns.
Those individuals who are employers may choose to use their pre-existing Social Security Number or a Federal Tax ID for the purpose of reporting their specialized tax return on behalf of their employees listed under their payroll.
The primary difference between Social Security Numbers and a Federal Tax ID is that Social Security Numbers can be validated as to origin and state as well as the year of issuance. The credit bureaus and issuers aligned with the tax return are trained in pinpointing fraud and as a result the fraudulent use of a Federal Tax ID or a Social Security Number to evade taxes will result in criminal charges.
The Federal Tax ID System:
The Federal Tax ID system was created by the Internal Revenue Service in 1974. The Federal Tax ID system was created to better organize employer tax returns and to dissuade those entities from cheating on their tax obligations.
A typical Federal Tax ID is written in the form 00-0000000 while the typical Social Security Number is written in the following form: 000-00-0000.
A business must obtain a Federal Tax ID number to pay employees and to legally file their business tax returns. To be considered a legitimate LLC, Corporation, S Corporation, Partnership, or any form of business, the entity must obtain a Federal Tax ID (more commonly known as an Employer Identification Number).
Any business that does not obtain a Federal Tax ID is considered a proprietorship and the owner or operator, as a result of this classification, is required to label as such on all tax documents.
The issuance of a Federal Tax ID to a non-profit organization is distinct from organizations who actually obtain tax-exempt status form the Internal Revenue Service. Each chapter or subsection of a non-profit organization must possess its own distinct Employer Identification Number, but the central organization may file for a group tax exemption.