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What business owners should know about employer ID numbers

On Behalf of | Oct 19, 2022 | Corporate Litigation

There are many steps to the process of business formation in New York. One of the important parts of the process is understanding how you will identify your business for the purpose of federal taxes. Consider that an individual employee filing taxes will use their social security number to identify themselves when filing their taxes. An employer ID number is one way that businesses do this, but not every business needs one.

When a business needs an EIN

Businesses with employees need an employer ID number. This is also true of businesses that are partnerships. Other examples of times a business needs an employer ID number (EIN) include businesses with a Keogh plan, LLCs taxed as a corporation or S corporation, or when a business is withholding taxes on the income they’ve paid a non-resident alien.

The employer ID number is a requirement for filing federal taxes. Many businesses file with the IRS for their EIN during the business formation process. Once a business in New York state has its employer ID number it must register with the state.

When a business may want an EIN

Sole proprietors don’t often need to register for an EIN and can instead use their social security numbers. Some business owners will decide they want to use an employer ID number anyway. This may happen if a proprietor prefers to use an EIN for business licenses, for their business bank account, or for filing their taxes.

Sometimes, a sole business owner first goes through the process of business formation with their social security number and later determines they need an EIN. This can happen if the business is going through bankruptcy or if the business has unexpectedly grown to include employees. While it may be simpler to get an EIN at the beginning, a growing business is able to change to an EIN later on if its tax requirements change.

For most businesses, the rules are simple. If a business has employees, it needs an employer ID number for tax purposes. It is a way for the IRS and the state of New York to identify a business.