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How to obtain a Tax ID number for a self employed person?

A research study by the United States Small Business Administration (SBA), Office of Advocacy revealed that there are 30.2 million small businesses in the nation and almost 126 million full-time workers. Today, 33% of such workers are considered as self-employed and according to McKinsey, a global consulting firm, there are approximately 68 million freelancers in the country. The question is – is there a requirement of EIN for self employed individuals?

Introduction to Tax ID Number for Self Employed

If you are a self-employed individual or are running a sole proprietorship business, you will be required to file annual returns as well as pay an estimated tax every quarter. Self employed individuals in the US are generally required to pay income tax as well as self-employment tax (SE tax) and for this, they are required to obtain a tax ID for self employed individuals. Normally, self employed individuals will require a Social Security number (SSN) to pay taxes but if you are planning to open a separate business account or invest in a Keogh Retirement Plan, you will have to obtain an Employer Identification Number (EIN). Hence, we have created this reference guide to provide information on tax ID requirements for self-employed individuals and how they can obtain it.

Self Employed Persons

Self employed people in the US operate within a wide range and within different industries contributing to the U.S. economy. A self employed person can be a freelancer, digital nomad operating a home-based business, and even a proprietorship or single member LLC. The requirement of a Tax ID like EIN for self employed individuals is dependent on several factors including the type of business or work, the purpose (for example opening a business bank account) etc. In order to identify the requirement for a Tax ID, it is imperative to understand the classification of self-employed individuals from business as well as from the taxation perspective.

What Is a Self-Employed Person?

A self-employed individual by definition is someone who doesn’t work for an employer or company that pays them a specific salary or wage. Self-employed individuals are also known as independent contractors and they earn their income by directly conducting business with a company or several companies. Generally, the employer or company with whom self-employed individuals are in trade will not withhold any taxes and as a result, it becomes the duty of the independent contractor to file their returns. The returns are filed using SSN or EIN for self employed individuals. According to Internal Revenue Service (IRS), you are considered to be self employed if you:

  • Are carrying on a business or trade as an independent contractor or a sole proprietor
  • Are a member of a partnership that conducts a business or trade
  • Are in a business for yourself and this includes part-time businesses as well

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.

Need any help from IncParadise?

There can be a lot of confusion when it comes to filing your EIN for a self-employed application and the process can also be time consuming. It is important to ensure that you provide the correct information as lack of it can lead to the application getting rejected. IncParadise can help you obtain your EIN online!

We, at IncParadise have been managing different aspects of new business formation for over a decade and will be able to help obtain tax ID for self employed individuals. We have a team of professionals with experience in several areas of business formation. Our team can address any query that you may have pertaining to a variety of business requirements right from incorporation to business licensing.

Are you a Sole Proprietor? Apply for your EIN Today!