If you’re operating a sole proprietorship, you are likely using your social security number (SSN) for tax purposes. While this can work for you, is it the best option? What about an employer ID number? Will that ever be necessary? Regardless of your tax status or entity type, you can find all of the resources you need at Gov Doc Filing. Today we’re going to discuss the merits of an employer ID number, as well as go over how to apply for EIN.
How Does a Sole Proprietorship Work?
This kind of business entity is based on the fact that you are the only person running the company. You are also the only one working for the company, meaning that you can’t have any employees.
Usually, freelancers or self-employed people will choose a sole proprietorship because it’s much easier to manage and there’s less paperwork involved.
What is an EIN?
An employer ID number is a separate tax entity issued by the IRS. As a sole proprietorship, you can use your SSN to file business expenses and taxes, but there are times when you have to get a separate tax ID number:
- If you decide to hire employees
- If you change your entity type (i.e., corporation, partnership, LLC)
- If you inherit a business from someone else
- If you have a Keogh retirement plan
However, even if you don’t fit these criteria, filing for an EIN can still be beneficial.
Benefits of Having an EIN
Since this will keep your business separate from your personal finances and taxes, there is a lot more flexibility and security. As a sole proprietor, having an EIN can:
- Protect you from identity theft
- Allow you to open a business or merchant bank account
- Limit your liability for debts and other business costs
- Allow you to file for bankruptcy without affecting your SSN
Overall, having an EIN is always a good idea. If you’re worried about the paperwork involved, use a third-party service to handle it for you. The process is simple, and you can get your tax ID number in a day or so.
Byron Simpson is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance cent.