EIN for Sole Proprietorship
The simplest and fairly common form of business in the US is a sole proprietorship business. It is a type of entity that is owned as well as run by an individual and is often known as a proprietorship, sole trader, or an individual entrepreneurship. This is a popular form of business because it is easy to set up and the cost of formation is nominal. Since a sole proprietorship and its owner are completely indistinguishable, the taxation is based on the fact that the income earned by the entity is the income earned by the owner. As a result, in order to file tax returns for sole proprietorship, you will be required to first obtain a tax ID for self employed individuals.
Do I need an EIN for a sole proprietorship?
Although sole proprietorship is one of the simplest forms of business, when it comes to obtaining a Tax ID, most owners are confused regarding the tax ID itself. It is quite popular that sole proprietors find themselves asking the question of whether they need to obtain an EIN for self employed individuals or they should file their taxes using the Social Security number (SSN). In reality, it is not mandatory for a sole proprietorship to obtain an EIN as the entity and individual are considered the same and hence tax returns can be filed using just the SSN. Similarly, applying for and obtaining an employer identification number (EIN) can prove beneficial for the enterprise and its owner.
When is an EIN Required for Sole Proprietors?
As a sole proprietor, it is never an easy task to manage the business as well as file the tax returns. It is a business structure where you have to ensure quarterly estimated tax payments using Form 1040-ES and annual return by filing Schedule SE (Form 1040). Of course, you can file these taxes using your Social Security number (SSN) and also by using an EIN for self employed professionals. Normally, sole proprietorship entities don’t require an employer identification number (EIN) except in specific cases as follows:
- Future employees: You may have started the business as a self employed professional but as your business and income grows so will the need for more employees. In the distant future, if you plan to hire employees, you will require an employer identification number. You can obtain a tax ID for self-employed individuals or EIN number now so that you don’t have to go through the entire application process in the future.
- Reduce certain risks: The Social Security number (SSN) is a unique nine-digit number that can be used for filing individual tax returns. The best way to reduce the risk of identity theft is to keep your SSN private. There have been instances of Social Security numbers being stolen and used for filing fraudulent tax returns as it helps in obtaining tax refunds. If you obtain a tax ID for self-employed individuals like the employer identification number then taxes will be paid using this tax ID thus protecting your SSN.
- Financial Instruments: If you are planning to keep your personal savings account separate from the sole proprietorship account then you will be required to open a bank account for the same. A business banking requires you to provide an Employer Identification Number (EIN). This tax ID number can also be used by lending and credit agencies to track your business credit. Another salient aspect of obtaining an EIN for self employed professionals is that it will help you to apply for certain business loans.
If I have a sole proprietorship with a DBA, do I need an EIN?
An Employer Identification Number (EIN) is a unique tax ID number that is used by businesses to report income tax and also handle payroll taxes. It is fairly common to use “doing business as,” or DBA name for sole proprietorship. The role of the DBA is to create a legal connection between the owner of the sole proprietorship business and the ‘doing business as’ name. A sole proprietorship with a DBA simply means that the said business has a nickname but that will not change the fact that the business and the owner are the same for tax purposes. So, yes, you can apply for and obtain an EIN for self employed professionals. If you want to maximize your benefits or else, you can pay taxes using your SSN.
How do I obtain an EIN?
A sole proprietor is a self-employed professional who can obtain an Employer Identification Number (EIN) in the same manner that corporations or LLCs would obtain the same from the IRS. You will be required to submit the completed Form SS-4 to obtain a tax ID for self employed individuals. You can submit the application using different methods like filing online, through phone, fax, and email. Alternatively, you can apply for an Employer Identification Number (EIN) right here through IncParadise.
It is important to know that EIN applications can take anywhere from a few days to almost four weeks to process. If you are filing an EIN for a self-employed application then you will be required to disclose specific business or personal information including Taxpayer Identification Numbers (TIN) like Social Security number (SSN) or the owner.