Getting a federal tax identification (ID) number is an important first step when you start your business.
According to the IRS, a federal tax ID number is used to identify a business. There are many reasons why a business may need one, including paying employees, claiming benefits and filing and paying taxes.
Here’s how to figure out if you need a federal tax ID number, how to apply for one and when your business should use it.
Federal tax ID number versus EIN
In short, a federal tax ID is the same as an EIN. As is often the case in business, though, you’ll hear several acronyms that all reflect the same concept. These acronyms can be confusing, but here is a clear breakdown of what each refers to and how they differ.
- The federal tax ID number is also known as the TIN.
- Another acronym for the federal tax ID number is the EIN, which stands for Employer Identification Number. An EIN must come from the IRS in order to be a federal tax ID number, and it is used to identify a business entity.
- An EIN may also be called a FEIN (Federal Employer Identification Number).
Does my business need a federal tax ID number?
A business needs a federal tax ID number in order to apply for a business bank account or loan. Here are several other questions to help you figure out whether your business might need a federal tax ID number:
- Do you have employees?
- Do you withhold taxes on any income other than wages paid to a nonresident alien?
- Is your business a partnership or corporation?
- Is your business involved with mortgage investments?
- Is your business involved with real estate conduits?
- Is your business involved with nonprofit organizations?
- Does your business handle estates, trusts or IRAs?
- Do you file a return for tobacco, employment, alcohol, differents or excise taxes?
If the answer to any of these questions is yes, your business likely needs a tax ID. For more information visit IRS.gov
If your business is tax-exempt, you still have to apply for an EIN. However, you must make sure your business meets the tax exemption requirements before you apply for an EIN.
Upon applying for an EIN, tax-exempt businesses have three years to prove their status. You don’t want to spend any of that time trying to jump through legal hoops and requirements to meet the tax-exempt regulations.
How to apply for a federal tax ID number
Once you’ve determined that your business needs a tax ID, you’ll work with the IRS to receive one. You can apply online; other options include phone, mail or fax.
A federal tax ID number is free, so steer clear of any scams that try to get you to pay for an EIN. The IRS administers and grants tax ID numbers to businesses throughout the United States, so you can apply directly at IRS.gov.
Here are the three key steps:
1. Make sure your business qualifies
To qualify for an EIN, your business must operate within the United States. As the business owner applying for the EIN, you must have a valid taxpayer identification number, such as a Social Security number or individual taxpayer identification number. Check the list of questions above to see if your business qualifies for a federal tax ID number. You can also find helpful information in the IRS online FAQ.
2. Only apply for one EIN per day
You are limited to filing for one EIN per day. If you are the only individual applying, you will be considered the responsible party for the business. The responsible party is the person who controls or owns the business entity and maintains the most control over business decisions.
3. Receive your federal tax ID number
After you submit your online application with all the required information, you should receive your federal tax ID number. You can view, download, save and print the confirmation notice — which includes your number — directly from the IRS website. You can start using your EIN as soon as you receive this notice.
Once you have your EIN, meet with a your local business banker to learn how a business bank account can help get you started on the right foot and what financing options may be available for you.
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