Are LLC’s Required To Have An EIN Number
An EIN is an Employer Identification Number. The IRS issues it to all business sizes and entities, including large corporations, limited partnerships, sole proprietors, and LLC’s. It is also called a Tax ID Number. But do you need one if you have an LLC?
Unless you plan on hiring others to work in your business, you may not need an EIN. However, there are other reasons the IRS may require you to have one. For example:
- You file your LLC as a corporation for tax purposes.
- You have partners, even if there is only one.
- You withhold certain taxes from nonresident workers.
- The government requires you to file excise taxes.
Here, I will help you navigate the IRS requirements for LLC’s. You’ll then learn the many advantages of having an EIN and how to use it to your advantage.
IRS requirements for EINs
There are several different scenarios where you may need to have an EIN. However, the IRS can be a little vague in its instructions. For that reason, I will attempt to demystify it here for you.
Single-person LLC’s that don’t hire anyone.
Forming a single person LLC is the same status as being a sole proprietor. If you do not have employees, you can use your social security number to file your taxes. You will most likely file a Schedule “C, ” same as a sole proprietor.
LLC’s that hire employees
If you plan to hire employees for your business, the IRS requires you to have an EIN. This unique identifier helps avoid confusion between your personal taxes and those of the LLC. It’s necessary for all businesses that hire employees, no matter what the size or type of entity it files taxes under.
But having others working for you may not be quite so simple. For example, let’s say you hire a contractor to do some work on your computer, and it takes four hours to complete. Do you need an EIN? No, not if they’re a contractor and not a regular employee.
However, it gets a little trickier if that computer technician becomes a part of your regular team. You can still hire that person as a contractor to do regularly scheduled maintenance, but you now need to take some precautions. Otherwise, the contractor could go to the IRS and claim employee status, getting you into some hot water along the way.
When hiring contractors to do work for you on a regular basis, you want to take your EIN or Social Security Number (SSN) off the table completely. Here’s how you do that:
Get the contractor to sign a W-9 form. This IRS form is similar to a W-4 form for employees. The contractor fills out their personal name or business, their contact address, and their EIN.
You then send a copy to the IRS office where you file. But be sure to keep a copy for yourself.
File form 1099. At the end of the year, file form 1099 to the IRS showing all amounts paid out to the contractor under their EIN or SSN. One copy goes to the contractor, and the other goes to the IRS office where you file your taxes. Be sure to keep a copy on file for yourself.
All this filing of forms and red tape may seem like a hassle to you, but it does three important things:
- It shows the IRS that the contractor is NOT an employe
- It Shows the IRS you were the one paying the money for services
- It helps solidify your tax advantages by showing your exact expenditures on one form
If more than one person owns the LLC, you will need an EIN. This requirement has the same purpose of keeping individual taxes separate from the business’ taxes.
If you set up your LLC as a C corporation, the IRS will require you to have an EIN. However, you do not need one for an S corporation since it is a pass-through entity, and the taxes flow through to the individual.
Instead of putting tariffs on goods and services going to and from other countries, governments levy excise taxes on businesses. The added cost is usually then passed on to the consumer on those products. As an example:
- Airline tickets
- Tanning equipment and services
If the IRS requires your business to pay an excise tax, you will need to obtain an EIN.
Withholding taxes from a nonresident alien
The same rule applies here as for other employees. Even if your worker is from another country, you must withhold income tax for that individual. And to do that, you need an EIN.
Advantages of having an EIN for your LLC
Even if the IRS does not require you to have an EIN, it still is a good idea to obtain one. There may be some complications with using your social security number to conduct business. Besides, having an EIN states to the business world that you are not just another hobbyist; you instead have a real business.
Here are the advantages to consider when deciding whether or not to obtain an EIN for your LLC:
Decreased chance of a tax audit
Most business owners point to this one significant benefit for their decision to apply for an EIN. It is a known fact that the IRS is far more likely to audit a sole proprietor with a social security number than an LLC with an EIN.
The odds of getting audited increase exponentially if the business claims a home office deduction. So, it is better to have an EIN to decrease the chances of the IRS knocking on your door.
Opening a business bank account
If you are a sole proprietor, there is usually no problem with the bank opening an account under your social security number. But if you show up saying you have an LLC, there better be an EIN to go with it.
In most cases, you will lose all credibility with your banker if you try to open a bank real business account with your SSN. It is best to avoid the hassles and run around and open your business account with an EIN.
Maintain credibility as a freelancer
It’s hard enough to get clients to trust you. But if you use your social security number to fill out W-9 forms and other legal documents, it may lower your credibility even further.
It is best to convey to the world that you operate as a real business and not as a part-time hobby. The first step to getting there is by getting an EIN.
A Final Thought
Obtaining an EIN is a reasonably straightforward process. First, you want to contact the IRS. They will then send you a fax or email to fill out. Once you mail it out, you will have your EIN within about two weeks.