Does a Sole Proprietorship Need an EIN?

Among the many advantages of a sole proprietorship is its simplicity. It is easy to set up. And there is less paperwork, especially when it comes to taxes.

As a sole proprietor, you file your business income and expenses on your individual tax return. Additionally, you use your Social Security number for your business activities.

But if you hire employees or open a business bank account, you may need an EIN.

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What Is an EIN?

An EIN, or employer identification number, is the number the IRS assigns to your business. Much like your Social Security number identifies you, an EIN identifies your business as a taxpayer. Thus, the EIN is sometimes called a taxpayer identification number or TIN.

How Do You Apply for an EIN?

First, you apply for an EIN by filing IRS Form SS-4 or filling out an online application. Then, the IRS attaches a nine-digit number to your business.

You use your EIN for all your business activities. For example, you will use your EIN when you:

• Hire employees
• Open business bank accounts
• File tax returns and withholding statements
• Apply for business licenses
• Apply for business credit or loans

When Does a Sole Proprietor Need an EIN?

IRS regulations do not require a sole proprietor to have an EIN. Instead, they allow the business owner to use their Social Security number as their taxpayer identification number. However, according to the IRS, an EIN is necessary when:

• You file excise tax returns
• You file pension plan returns
• You file Chapter 7 bankruptcy (liquidation)
• You file Chapter 11 bankruptcy (reorganization)
• You form a corporation, limited liability company, or partnership

Four Other Reasons To Get an EIN

Even if you don't need an EIN under IRS guidelines, it is wise to get one for other reasons, including:

1. You Want Protection from Identity Theft

When conducting business, you frequently use your EIN on various documents and applications. However, as a sole proprietor, you use your Social Security number. Therefore, you can protect your Social Security number by not sharing it and, instead, using an EIN.

2. You Work as an Independent Contractor

If you are a sole proprietor working as an independent contractor, having an EIN is another way to protect yourself. When working for a company, you provide your Social Security number. However, by using your business EIN, you keep your Social Security number private.

Additionally, businesses that hire independent contractors do not want them considered their employees for tax and liability reasons. Therefore, supplying your EIN instead of a Social Security number shows that you are an independent business entity.

3. You Would Like To Establish Business Credit & Credibility

Suppose you need business credit or a business credit card. In that case, you must include the EIN on the credit or loan application. Further, an EIN gives your business a more professional image.

4. Your State Law Requires It

State laws vary regarding the use of EINs. Many states require that businesses have an EIN if they apply for licenses, pay state taxes, or other purposes.

Unsure of Whether To File for an EIN? A Lawyer Can Help.

Sole proprietors can use their Social Security number for business activities. However, there are times when it is necessary to have an EIN for your business. If you are unsure if you need to file for an EIN, consult a small business attorney or accountant.