Switching to an Employer Identification Number (EIN) from a Social Security Number (SSN) can have security, tax and business implications. Here’s what you need to know.
Dear Your Business Credit,
I run a solo professional services firm. What are the implications of switching from using my Social Security number to an EIN? – June
Overall, it will probably help you to set up an Employer Identification Number (EIN). Many solo business owners who start out using their Social Security number eventually switch over.
Using a Social Security number during the early months of running a business is usually the easiest, because it requires no setup. However, as business owners become more confident they will stay in business, they often formalize things and set up the business as an entity with separate finances from their own.
You can apply online to get an EIN for free through the IRS’s website.
See related: 6 steps to protect your business from ID theft
Security reasons to obtain an EIN
One reason many transition over from using their Social Security number is growing concern about identity theft.
Many crooks try to get their hands on their victim’s Social Security numbers, so the less you circulate yours, the better.
When a client asks you to fill out a contract that goes through the company’s email system, you really don’t know where the information you submit will end up. It could be sitting in a document that’s printed out and left on someone’s desk in plain sight, for all you know.
Using the business’s EIN instead can help you protect your personal information. Of course, you need to be careful with your EIN, too. Businesses may be affected by identity theft, too.
Business reasons to use an EIN
There are other business reasons to use your EIN. Often you will need an EIN to open a business bank account. Some states’ laws also require businesses to have an EIN to file taxes.
Having an EIN is also relevant if you form an LLC. Many attorneys recommend that sole proprietors do so to create separation between their assets and those of the business.
Tax benefits of using an EIN
When you open an LLC with only one member – yourself – the IRS considers the business a “disregarded entity” for tax purposes.
This name doesn’t exactly roll off the tongue but essentially, it means the company’s status as an LLC is not counted for tax filing purposes and the LLC’s activities should be reflected on your personal tax return.
If your LLC is a disregarded entity, you must provide your personal Social Security number or EIN when you file your income tax – not the LLC’s EIN.
However, for certain tax requirements, you must provide the LLC’s EIN. When you pay employment and excise taxes, you must use the LLC’s EIN, as the IRS explains.
Other business benefits of using an EIN
Having an EIN can make your business more attractive to clients, particularly large companies that have a rigorous vetting process to make sure contractors could not be deemed employees by government labor officials and cause them to get into trouble for misclassifying workers.
If you get an EIN for your business, it is one form of proof that you work for yourself and are not an employee. You may also have to present other evidence, such as a website where you market your work, business cards and even redacted 1099 forms from other clients.
An EIN can also give you access to more retirement options. You will, for example, need to have an EIN to open a Keogh plan or solo 401(k).
No business owner yearns for more paperwork, but getting an EIN is one case where it can really pay off.