Before you can open your business, you need to choose a business entity and have a federal tax ID number. You have to have this number so you can sell products or earn revenue. However, many business owners find the process of applying for a number to be confusing and overwhelming. With help from our Chapel Hill accountants, you can feel confident that you’re choosing the right business entity and will have your ID in hand quickly so you can get your business off the ground.
A federal tax ID is a nine digit number assigned by the IRS to classify how a business is taxed. All businesses must have a business entity and have a number associated with it. Federal agencies use the number to identify and regulate each business.
We are often asked if your federal tax ID (sometimes called a Tax Identification Number, or TIN) and employer identification number (EIN) is the same thing. The answer is yes, though the terminology is used in different situations. The EIN is used on tax forms, like your employees’ W-2s to help them do their taxes.
Some types of businesses, rather than receiving a TIN, will use their social security number. For individuals who are not eligible for a social security number but operate an LLC or a sole proprietorship, they will use an Individual Taxpayer ID Number (ITIN).
Nearly all businesses require applying for a federal tax ID number. The only businesses who don’t are:
If you establish your business as a sole proprietorship or a limited liability corporation, and you don’t have any employees on your payroll, you can use your social security number. Your business taxes are included in your personal tax return, so there’s no need to apply for a federal tax ID number for your Chapel Hill business.
If your business is a limited liability corporation with W-4 employees, or you choose a corporation or partnership, your business must apply for a federal Tax ID.
It is highly advisable that even tax-exempt organizations file for a Tax ID number. Regardless of whether the institution has employees, there may be circumstances when the EIN is needed.
It’s important to know there are no fees to apply for your business TIN, though there may be fees related to establishing your business entity.
To apply for your federal tax ID number, fill out fill out the IRS form SS-4 and mail it in. Before you do, you may benefit from speaking to a small business accountant to ensure you are choosing the best entity for your business and that your documentation is recorded properly. Changes can set your business back by weeks, so you want to make sure it’s correct the first time.
Selecting the right business entity for your company can be confusing, and making a mistake can have a drastic impact on your small business tax obligation. An experienced CPA can guide you through your business entity classification to make sure you select the right Federal ID for your company.