Do Sole Proprietors Need an Employer Identification Number?

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Quick Reference

Starting a small business as a sole proprietor is often the simplest and least expensive way to begin a business venture. The title of a sole proprietor is automatically applied to business owners who are the only employee of an unincorporated business.

Starting a business brings lots of registrations and questions like whether an Employer Identification Number or EIN is required.

Answering this question can get complicated. As such, let’s take a few moments to discuss what an EIN is, when a business entity might need one, and how to obtain one.

Purpose of an EIN

An EIN, referred to as a Federal Employer Identification Number, FEIN, or an Employer Identification Number, is a unique nine-digit number used to identify a business or taxpayer for federal tax purposes. To obtain one, you can apply directly with the Internal Revenue Service (IRS).

In this way, an EIN is very much like a social security number.

While an EIN is required for general partnerships, corporations, and multi-member LLCs, sole proprietorships and single-member LLCs are required to get an EIN if they have employees. Sole proprietors and single-owner Limited Liability Company may choose to use either their SSN or ITIN as their Tax ID Number, provided they don’t have employees. Additionally, some banks may require (or strongly request) an EIN in order to open a small business bank account or apply for business loans.

When Does a Sole Proprietor Need an EIN?

Plenty of sole proprietorships (this includes independent contractors) and single-member LLCs do not need an EIN. Here are some of the most common reasons an EIN is required.

Still, there are a few potential situations that may call for an EIN. They include:

  • Needing to hire employees and pay employment taxes
  • Needing to file a pension plan tax return
  • Needing to file an excise return
  • Having clients which require the submission of Form W-9

Even though an EIN may not be required for your business, you may want to consider getting one. Considering the process takes only a few minutes and doesn’t cost anything takes some of the pressure off.

Related: Can I Use the Same EIN for Multiple Businesses?

Benefits of an EIN Even If It’s Not Required

Getting an EIN takes anywhere from five minutes with the online EIN application to up to five weeks for the mail-in appliation, depending on your method of submission. A few benefits to consider to having an EIN include:

  • Reducing the potential for identity theft since you aren’t using your SSN for the business
  • Using an EIN can help build business credit in some cases
  • May be needed when applying for business licenses and permits

How to Obtain an EIN

The EIN application process is reasonably straightforward. Applying for and receiving an EIN doesn’t cost a cent when you use the IRS website to access IRS Form SS-4. You could choose to use a third-party designee to apply for you, but it’s not necessary.

There are four primary ways to obtain an EIN. They are:

  1. Filing the online application at the IRS website
  2. Applying via fax
  3. Calling in to apply
  4. Applying by mail

Applying online is the most convenient way to get a new EIN. That option typically takes around five minutes to complete. Alternatively, mailing your application in and waiting for a response may be the most time-consuming option at up to five weeks.

Related: How to apply for an EIN

Related: How long does it take to get an EIN?

What Is the Difference Between EIN and Tax ID?

Once you understand what an EIN is used for, you may begin to question the purpose of a tax ID number. Don’t worry, tax ID numbers are just as valid as an EIN, except that an EIN is functional on a federal level.

Related: What are the Differences Between the SSN, ITIN, and EIN?

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