Employer Identification Number (EIN)

An Employer Identification Number is the taxpayer identification number the Internal Revenue Service assigns to an entity, written as nine digits in the form 12-3456789. Businesses use it, but so do estates, trusts, retirement plans, and tax-exempt organizations, which is why the name is misleading: having employees is one of several reasons to need one, not the definition. The IRS also calls it a federal tax identification number, and it is one species of taxpayer identification number alongside the Social Security number, the ITIN, and the adoption taxpayer identification number. An EIN is purely an identifier. It does not create an entity, license an activity, confer tax-exempt status, or separate the owner's assets from the business's.

Whether a particular person needs one is a separate question with its own answer, and it turns on the activity rather than on the form of the business. A sole proprietorship covers the triggers for an unincorporated one-owner business, and the treatment of a single-member LLC, which is disregarded for income tax but a separate entity for employment and certain excise taxes, belongs to the limited liability company entry.

The responsible party is the part of the application people get wrong. The instructions to Form SS-4 are explicit: "Unless the applicant is a government entity, the responsible party must be an individual (that is, a natural person), not an entity," and only a government entity may enter an EIN in that field. So a holding company cannot be named as the responsible party for a subsidiary, and a promoter or filing service cannot stand in for the owner. The role has to be a natural person who actually controls or directs the entity and its funds. Where that person has no Social Security number or ITIN and is ineligible to obtain one, the instructions direct the applicant to enter "foreign" rather than to name somebody else, which is the point foreign-owned entities most often get wrong.

That designation is not a one-time entry on a form. The instructions to Form 8822-B state that "any entity with an EIN is required to report a change in its 'responsible party' ... within 60 days of the change," citing Treasury Regulation section 301.6109-1(d)(2)(ii), and add that entities changing their address or their responsible party must file the form "whether or not they are engaged in a trade or business." The reach of that last clause is easy to underestimate. A family trust whose trustee changes, an estate whose personal representative is replaced, and a two-member LLC one member leaves are all entities with EINs and all inside the rule, none of which thinks of itself as a business with an IRS reporting deadline. What happens on a missed deadline is worth knowing too, because it is not a penalty. The form itself states that filing is mandatory once the responsible party has changed and that no penalty applies for failing to file it, but that an entity which has not told the IRS who controls it may not receive a notice of deficiency or a demand for tax, while penalties and interest on the underlying liability accrue regardless. The exposure is a missed notice rather than a fine.

Sequence matters too, and the IRS is explicit about it. For a legal entity, "form your entity through your state before you apply for an EIN," because an application filed ahead of the state formation may be delayed. Applying first is a common and avoidable false start.

The other half of the page is what an EIN does not do. It is not a business license, and a local or occupational license is a separate filing. It is not a state tax registration, and a state identification number for withholding or sales tax is issued by the state, not the IRS. It is not a seller's permit, and it is not a DUNS number, which is a commercial credit identifier from a private company. Readers regularly arrive with all four collapsed into one idea, and only the EIN is federal. It is also not liability protection. That comes from the entity, if the entity is respected, and even then insurance and entity choice answer different problems.

The order of operations for a new entity runs state first, then federal. Form the entity with the state. Identify the responsible party, who must be a person with a Social Security number or ITIN. Apply directly with the IRS, which is free and issues the number immediately in the ordinary online case. Then give the number to the bank, to payroll, and to anyone who has to issue an information return. From that point the entity is expected to file. The IRS states it directly: "Once you get an EIN, you must file required tax returns or information returns." A number requested for convenience still creates that expectation, which is worth weighing against the reason many sole proprietors get one, namely not handing a Social Security number to every client.

Whether a later change requires a new number is a distinct question, and the answers are not intuitive. For a sole proprietor, the IRS says to get a new EIN on incorporating, on forming a partnership, and on declaring bankruptcy, but not on changing the business name or location, and not on owning multiple businesses. For a corporation, electing to be taxed as an S corporation does not require a new EIN, and neither does converting at the state level without changing the business structure. For trusts, the rule that catches families is that a revocable trust changing to an irrevocable trust needs a new EIN, while changing the trustee, or the grantor's or a beneficiary's name or address, does not.

A hypothetical illustration of how those rules land together. Nadia and her brother run a two-member LLC with an EIN, and Nadia is the responsible party. Her brother buys her out and continues alone. The LLC has not been reorganized, so its EIN survives, but the responsible party has changed, and Form 8822-B is due within 60 days. Separately, their mother's revocable living trust becomes irrevocable at her death, so the successor trustee has to obtain a new EIN for it, and the estate itself needs its own EIN before an executor can open an estate account. Three EIN consequences from one year of ordinary family events, and only the first belongs to a business.

Pros

• Free, fast, and issued directly by the IRS, with no legitimate reason to pay a third party for one.
• Lets a sole proprietor give clients an identifier other than a Social Security number on Forms W-9 and 1099.
• Required for employees, for a partnership or corporation, for many excise taxes, and for administering certain trusts, retirement plans, and estates.
• Banks and payment processors generally expect one before opening a business account, and some counterparties will not contract without one.
• An entity's EIN carries its own annual Series I savings bond purchase limit, separate from the owner's.

Cons

• Getting one creates filing expectations. The IRS says that once an entity has an EIN it must file required tax returns or information returns.
• It brings a permanent reporting duty. A change of responsible party has to be reported within 60 days, and nothing prompts the entity to do it.
• It is widely mistaken for a license, a tax-exempt determination, or liability protection, and it is none of those.
• The IRS issues only one per responsible party per day, which can slow the formation of several entities by the same person.
• Some changes of structure force a new number, which then has to be given to every bank, payroll provider, and counterparty again.