What business clients should know about EINs

The topic of Employer Identification Numbers is sure to arise as accounting professionals help their business clients get all of their tax to-dos in order. When does a business need an EIN?

In this article, I'll discuss what the IRS says about the circumstances when business entities need an EIN (also sometimes known as a “federal tax ID number”). I'll also cover some of the situations when a business may need to change its EIN.

Let’s take a moment to review what the IRS says about EINs.

The IRS requires an individual or business to have an EIN when:

• It has employees.
• It operates as a corporation or partnership.
• It files any of the following tax returns: Employment; Excise; or Alcohol, Tobacco, and Firearms.
• It withholds taxes on income, other than wages, paid to a non-resident alien.
• It has a Keogh plan.
• There’s involvement with any of the following: trusts (some exceptions apply); IRAs; exempt organization business income tax returns; estates; real estate mortgage investment conduits; nonprofit organizations; farmers’ cooperatives; or plan administrators.

There’s more information about EINs on the IRS website, but this covers the highlights of when a business will need one.

The ABCs of EINs according to business entity type

Now let’s look at a few business entity types and discuss how EINs relate to them.

1. Sole proprietorships and single-member LLCs. Sole proprietorships and single-member LLCs that do not have employees may not need an EIN because the company is considered a “disregarded entity” for tax purposes. In this scenario, the LLC member may use their Social Security number for taxes.

However, a company will need to obtain an EIN if it hires employees. And if a single-member LLC elects to be taxed as a corporation (either C or S corporation), it will need to apply for an EIN. Also, if a business’s situation matches any of the other IRS criteria that require an EIN, it must obtain one. Also, know that some states may require single-member LLCs to have an EIN to file their taxes.

Note that even if a sole proprietor or LLC member doesn't have to get an EIN, they may want to do so for security and privacy reasons. Social Security numbers are linked to bank accounts and credit cards, but EINs are not, thus adding a layer of identity theft protection.

2. Partnerships and multi-member LLCs. Partnerships and multi-member LLCs, because they are considered either partnerships (by default) or corporations (by electing to be taxed as either a C or S corp), must have an EIN. The requirement is a beneficial one for these entities because an EIN helps establish a clear separation between a business entity and its owners.

3. C corporations and S corporations. The IRS is crystal clear: Corporations must have an EIN. The requirement applies to C corporations and LLCs or corporations that have elected to be treated as S corporations for tax purposes.

How businesses can obtain an EIN

IRS Form SS-4 is used to request an EIN. An entity’s responsible party must be someone with an SSN, ITIN, or EIN to apply for an EIN online. There's a limit of one EIN request per day. The IRS allows businesses to give someone else (called a “nominee”) limited authority to act on the entity’s behalf to prepare and submit the EIN application. Still, the SS-4 form must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the business’s true responsible party.

Your clients in the U.S. have the option to apply online, by fax, or by mail to request their EINs. Completing the form online is the fastest method to get an EIN (they are issued immediately). According to the IRS, EINs requested via fax will be sent in approximately four days, and those requested by snail mail will be sent in about four weeks.

If you have international clients who need to obtain an EIN, the IRS suggests they apply by phone by calling (267) 941-1099. Instead, foreign-based individuals can submit the application without a federal tax ID number by fax or mail to the IRS, but the approval process can take quite a while (approximately one to two months).

When a business must get a new EIN

The IRS indicates that the following changes require that a business apply for a new EIN:

• Change in ownership; or,
• Change in business structure.

However, there are some exceptions to that rule and additional circumstances when a new EIN may be needed.

The IRS website has a descriptive list of the scenarios by entity type to help determine when a business must get a new EIN. I’ll summarize it below, and I encourage you to visit the website for more information and details.

1. Sole proprietors. According to the IRS, sole proprietors with employees must get a new EIN if:

• They are subject to a bankruptcy proceeding.
• They incorporate their business.
• They bring on partners and operate as a partnership.
• They buy or inherit an existing business that they will operate as a sole proprietorship.

A new EIN is not needed when:

• They change the name of their business.
• They change the business location or add locations.
• They operate multiple businesses.

2. Partnerships. Businesses operating as partnerships must get a new EIN if:

• The partners incorporate the business.
• One of the partners takes over the business and operates it as a sole proprietorship.
• The partners close the partnership and begin a new one.

A new EIN is not necessary when:

• The partnership declares bankruptcy.
• The partnership changes its name.
• The partnership changes its locations or adds other locations.
• The partnership is terminated, and a new partnership is formed, as described under Internal Revenue Code section 708(b)(1)(B).
• If within 12 months, 50% or more of the ownership of the partnership (as measured by interests in capital and profits) changes hands.

3. LLCs. An LLC will need to apply for a new EIN if:

• A new multi-member LLC is formed.
• A new single-member LLC is formed and chooses to be taxed as a C corporation or an S corporation.
• A new single-member LLC is formed that must file excise tax or file employment taxes for wages paid to employees.

A new EIN is not required if:

• The LLC reports income tax as a branch or division of a corporation or other entity, and it has no employees or excise tax liability.
• An existing partnership converts to a multi-member LLC that will be classified as a partnership.
• The LLC changes its name or location.
• The LLC already has an EIN and chooses to be taxed as a corporation or an S corporation.
• A new single-member LLC is formed that doesn't have employees or excise tax liability, nor does it choose to be taxed as a corporation or S corporation. Note, however, a client’s bank or the state (for state tax purposes) may require an EIN.

4. Corporations. The IRS requires a new EIN for a corporation if:

• The corporation receives a new charter from the jurisdiction’s Secretary of State.
• The corporation is a subsidiary of a parent corporation, and it uses that parent's EIN, or the corporation becomes a subsidiary of a corporation.
• The corporation changes to a partnership or a sole proprietorship.
• A new corporation is created after a statutory merger.

Corporations do not have to obtain a new EIN if:

• The business unit operates as a division rather than a subsidiary of a corporation.
• After a corporate merger, the surviving corporation uses the existing EIN.
• The corporation declares bankruptcy.
• The corporation changes its name or location.
• The corporation elects for S corporation tax treatment.
• The corporation reorganizes and only changes its identity or location.
• The business changes from a corporation to another through a statutory conversion process that does not require the corporation to be dissolved and an entirely new entity formed.

Where to learn more

As accounting professionals, you already have a great deal of knowledge you can share with your clients as they navigate the questions and challenges of starting and running their businesses. Also, you — and your clients — might find the IRS’s list of EIN FAQs helpful.

For scenarios you’re not familiar with or have not encountered before, I encourage you to tap into your professional community for insight. And, of course, contact the IRS if you're unclear about the service's rules about EINs. I also recommend checking with the Secretary of State offices where your clients' businesses are registered to determine if any changes at the state or local levels might require new tax ID numbers in their jurisdictions.