History of the Federal Tax ID
The concept of a federal tax ID dates back to the Social Security Act of 1935, which required employers to obtain a separate identification number for payroll tax purposes. Initially known as the Federal Taxpayer Identification Number (FTIN), the EIN was first introduced in 1961 as a way to keep track of business tax filings. The EIN replaced the previously used Employer’s Identification Number (EIN) system, which proved ineffective in tracking taxpayers.
In the years following the introduction of the EIN, various modifications were made to its structure and usage. For example, in 1974, the IRS began requiring an EIN to be included on all tax returns, and in 1994, the agency launched its electronic filing system, which made it easier for businesses to apply for and manage their EINs.
Why Do You Need an EIN?
As stated earlier, the primary purpose of an EIN is to identify businesses and track their taxation activities. With an EIN, businesses can easily file their tax returns, pay taxes, and access other business-related transactions without having to use their personal Social Security Number (SSN). So, if you’re starting any type of business in the US, you’ll need to apply for an EIN.
Here’s a closer look at some of the specific functions of an EIN.
Filing Tax Returns
One of the most important reasons a business needs an EIN is to file tax returns. Unless you’re a sole proprietor with no employees, you must obtain an EIN to file taxes with the IRS. Tax returns include income tax returns, payroll taxes, excise taxes, and other federal tax returns.
An EIN provides the IRS with accurate information about your business, such as its income, how much it has paid in taxes, and any liabilities. By filing all the required returns promptly and correctly, you avoid penalties and audits and keep your business compliant.
Opening Bank Accounts
Another function of the EIN is to facilitate opening a business bank account. A bank requires an EIN to identify the business and to report legitimate transactions to the IRS. Without an EIN, you would need to use your personal account and risk mixing your personal and business finances, making it difficult for both parties to track business growth and tax obligations.
Applying for Business Permits and Licenses
Depending on the type of business you’re starting or running, you may need to secure various government permits and licenses. In general, it’s required to have an EIN to obtain such documents. The EIN provides the government with a means to trace permit/license payments and verify the authenticity of the business’ finances.
If you own a business that employs staff, you must get an EIN. That’s because an EIN enables you to withhold taxes from your employees’ paychecks and report them to the IRS. Additionally, it allows you to track and report employment taxes for your business operations in an effective and organized manner.
Conducting Business Activities
Finally, an EIN also serves as a digital signature for your business. EIN verifies the identity of the business in legal dealings, enabling it to carry out various transactions, such as leasing property, signing contracts, and applying for loans. In addition, applying for an EIN can legitimize a business in the eyes of other businesses, regulators, and investors.
How to Obtain an EIN
Getting an EIN is a simple process and most commonly done online using the IRS’s free online EIN application system. Other methods of obtaining an EIN include by mail, facsimile, and telephone.
To get your EIN online, you will need to select the entity type of your business, fill out the application form, and submit it to the IRS for processing. Certain types of businesses may require additional documents, such as copies of business licenses, partnership agreements, or other legal documents. The IRS processes applications daily and sends the EIN via email or post to the business within a few weeks of the application.
The Federal Tax ID or Employer Identification Number is a crucial requirement for running a business in the United States. It makes it easier for businesses to handle their tax obligations, file returns, and engage in specific permitted activities easily. Therefore, obtaining an EIN should be one of your top priorities when starting any type of business in the United States.
In case of any doubts or questions, the IRS website provides valuable information on EINs and the taxation process for various types of businesses. Always make sure you provide accurate information when applying for an EIN, as it helps keep your business compliant with tax laws and regulations.
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.