Federal ID Number
A Federal ID Number, also known as Employer Identification Number (EIN), is a unique nine-digit number issued by the Internal Revenue Service (IRS) to businesses for tax purposes. It is the corporate equivalent to a social security number. EINs are used by employers, sole proprietors, corporations, partnerships, non-profit organizations, trusts, estates of decedents, government agencies, certain individuals, and other business entities.
Last updated: July 23, 2023 • 5 min read
What Is Federal ID Number?
A Federal ID Number, also known as an Employer Identification Number (EIN), is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to businesses operating in the United States for identification and tax purposes. Similar to a Social Security number for individuals, the Federal ID Number is used by the IRS to identify a business entity and track their financial transactions.
What Is the History of Federal ID Number?
The Federal ID Number, more commonly known as the Employer Identification Number (EIN), came into existence along with the creation of the federal income tax in 1913, following the ratification of the 16th Amendment to the U.S. Constitution. However, until the 1930s, individual Social Security numbers were the primary means of taxpayer identification.
It was around the time of the Great Depression and the initiation of the Social Security Act in 1935 that the need to identify businesses for tax purposes gained prominence. However, widespread use of EINs did not begin until the conclusion of World War II when federal taxing powers increased substantially.
The Employer Identification Number system was established to identify and track tax obligations of businesses and other entities that are not individuals. Since the Internal Revenue Service (IRS) manages this number, it's also termed as an IRS Number. This system has continued to this day, and the requirement to obtain an EIN applies to nearly all businesses, trusts, estates, and many other sorts of entities.
Over time, EINs have evolved into general identifiers for businesses beyond just taxation, and are used for a variety of business needs, including opening bank accounts, applying for business licenses, and more.
What's the Difference Between Federal ID Number and Taxpayer Identification Number (TIN)?
The difference between Federal ID Number (Employer Identification Number/EIN) and Taxpayer Identification Number (TIN) lies within their purpose and usage.
A Federal ID Number, or EIN, is a specific type of Taxpayer Identification Number. It is assigned by the Internal Revenue Service to business entities. EIN is used by the IRS to identify corporations, partnerships, trusts, estates, and other business entities for tax purposes.
On the other hand, a Taxpayer Identification Number (TIN) is an umbrella term for the various types of numbers assigned by the IRS to individuals and entities for tax purposes. These includes Social Security Numbers (SSNs), Individual Taxpayer Identification Numbers (ITINs), and Employer Identification Numbers (EINs).
So essentially, every EIN is a TIN but not every TIN is an EIN as TIN can also represent SSN, ITIN, and other types of taxpayer identification numbers.
What Are Some Examples of Taxpayer Identification Number (TIN)?
Following are some examples of Taxpayer Identification Number (TIN):
Social Security Number (SSN): This is issued to U.S. citizens, permanent residents, and temporary working residents. The Social Security Administration issues the SSN.
Employer Identification Number (EIN): This is issued to businesses operating in the United States.
Individual Taxpayer Identification Number (ITIN): This is a tax processing number for individuals who are not eligible for an SSN, such as nonresident aliens or foreign nationals who need to file federal taxes or tax returns.
Taxpayer Identification Number for Pending U.S. Adoptions (ATIN): This is a temporary identification number given by IRS to children who are in the process of being adopted in the United States and who cannot get an SSN.
Preparer Taxpayer Identification Number (PTIN): This is issued to paid tax return preparers.
These numbers are issued both by the IRS and the Social Security Administration (SSA) and have a crucial role in the administration of tax laws.
What Are the Benefits of Federal ID Number?
Here are several benefits of having a Federal ID Number (or Employer Identification Number, EIN):
Start a Business: An EIN is typically required to legally establish a business. It's needed to open a business bank account and to file federal and state taxes.
Hire Employees: If a business plans to hire employees, it needs an EIN for payroll purposes and to pay employment taxes to the IRS.
Establish Business Credit: An EIN can be used by a business to establish credit. It separates the business's financial activity from the owner's, helping the business build a distinct credit profile.
Apply for Business Licenses and Permits: Certain business licenses and permits require an EIN.
Create Trusts, Estates, or Non-Profit Organizations: Trusts, estates, and non-profit organizations can use an EIN to apply for exempt status, administer assets, and handle other legal requirements.
Privacy: Utilizing an EIN instead of a Social Security Number in business transactions can reduce the risk of identity theft. This is especially useful for sole proprietors.
The EIN is a critical element in maintaining a business's legal and financial compliance, providing a variety of opportunities for business growth and development.
What Are the Potential Drawbacks or Challenges Associated With Using a Federal ID Number?
While having a Federal ID Number (EIN) comes with numerous benefits, there can be potential drawbacks or challenges associated with its use:
Privacy Issues: If your business information, including the EIN, is not kept confidential, it could be used for fraudulent activities, similar to the misuse of a personal Social Security Number.
Regular Reporting: Once you have an EIN, you’re required to file certain business tax returns with the IRS annually, even if you have not conducted any business during the year. Failure to do this might lead to the IRS closing your account.
Administrative Work: If major changes happen to your business, like change in ownership structure or business type, you might have to apply for a new EIN. This can create additional administrative work.
EIN Mismatch: Issues can arise if the IRS' record of your EIN does not match what you have on file. This can occur due to administrative errors, changes not appropriately reported to the IRS, or identity theft. Such mismatches can lead to issues with tax filing and potential penalties.
Despite these potential challenges, having an EIN is typically essential (and legally required) for most businesses. Understanding these issues can help businesses plan accordingly and put measures in place to mitigate potential risks.
Which Types of Businesses Typically Require a Federal ID Number (EIN)?
The following types of businesses typically require a Federal ID Number (EIN):
Corporations or Partnerships: Any business operating as either a corporation or a partnership is required to obtain an EIN.
Limited Liability Companies (LLCs): An LLC with more than one member typically requires an EIN, even if there are no employees.
Sole Proprietors with Employees: Sole proprietors who hire employees need an EIN for tax reporting for their employees.
Non-Profit Organizations: Non-profits, including churches and clubs, need an EIN, even if they don’t have employees.
Estates and Trusts: These entities require an EIN for banking and tax purposes.
Farmers' Cooperatives: These organizations require an EIN.
Plan Administrators: Retirement plan administrators often need an EIN.
Businesses Filing for Bankruptcy: Any business filing for bankruptcy must have an EIN.
Businesses Involved with Trusts, IRAs, or the Closing of an Inheritance: These situations typically require an EIN.