Does Your Sole Proprietorship Require a Federal Tax ID?

Business and Taxes go hand in hand!

Many of my new client initial contacts revolve around inquiries about trade secret, trademark or copyright protections.  While these are important new business issues to address, more often than not new business clients are so focused on the nuts and bolts of their new venture that they have not thought too much about whether and how to organize that business.  While corporate or limited liability entities are sometimes appropriate, the initial activities of many new businesses occur by an individual doing business as a sole proprietor under their own name or a fictitious business name.

One frequent question is whether or not a sole proprietorship requires a federal Employer Identification Number (EIN). Like many, the answer to this question is not a simple yes or no.

What is a Sole Proprietorship?

A sole proprietorship is a business run by a single owner. While it is possible to have more than one individual running the business, there can only be one person listed as the entity’s owner. The owner of the sole proprietorship is personally liable for any debt incurred by the business or lawsuits brought against the business. Despite this, running a sole proprietorship has its perks. For example, the owner of such a business has complete control over any and all decisions made concerning the business. Also, a sole proprietorship is not required to be chartered by any state and finally, while every business, regardless of the type of entity, is responsible for paying both state and federal taxes, not every sole proprietorship must obtain an EIN.  Only certain sole proprietorships must obtain this tax ID, if their business meets the requirements laid out by the IRS to do so.

Standard Requirements:

Any sole proprietorship falling under the following categories must obtain and file taxes under an EIN:

  • Sole Proprietorship with employees
  • Sole Proprietorship that withholds payroll income taxes
  • Sole Proprietorship that files federal tax returns on employment, excise, alcohol, tobacco, and or firearms
  • Sole Proprietorship involved in real estate, plan administration, farmers cooperatives and trusts, or holding Keogh plans

Whether required to obtain an EIN or not, every sole proprietor has the option of doing so.  Even if an EIN is not required, it may be preferred simply in order to separate the client’s business financial activity and tax reporting events from the owner’s personal social security number.

How to Apply for an EIN:

EIN’s are issued by the Internal Revenue Service.  The process is simple.  An individual can request up to five (5) Employer Identification Numbers a day from the IRS.  Individuals may request their EIN by mail, through fax, online or by telephone.  For a quick approval, obtaining an EIN by telephone or online is the best method. These two methods enable an individual to have their EIN approved immediately if no additional information is required.  If requesting an EIN by mail or fax, allow for at least 4 weeks before expecting an EIN issued for your company. EIN applications sent by fax or mail are processed on a first come first serve basis.

The following website contains a fast, secure online form to request a Federal Tax ID.

Regardless of the method one chooses to use, obtaining an EIN is fairly simple and provides your business with a form of federal identification separate from the owners personal identification information.