Businesses of all sizes can utilize an EIN. Most will be required to obtain an EIN (FEIN), but a smaller percentage of business owners can elect to use their SSNs instead. However, there are many benefits for all businesses to obtain an EIN, even if not required under federal or state tax laws.
Whether or not online retailers need EINs will depend upon several factors. If you run the following types of businesses and work solely by yourself, you may be able to get away without having an EIN with your e-commerce store.
- Affiliate marketing
- Dropshipping
- Selling crafts or other handmade products
- Services, such as coding, web design, app building, graphic design, etc.
- Selling your own books or artwork
1. An EIN Provides Business Owners With A Level of Identity Theft Protection
Identity theft is a persistent problem. In 2023, ID theft had cost Americans a staggering $43 billion. If you’re an online retailer, chances are you deal with multiple entities throughout the course of business.
Imagine handing out your SSN to every vendor, supplier, client, payment platform, or other entity your online sales company deals with where you need to supply tax IDs. Your SSN could easily be stolen, sold, or accidentally breached if you deal with an unscrupulous entity or if they have lax security processes.
Every time you put your SSN on a document or form, you open yourself to risk. Obtaining an EIN to share instead of your SSN provides business owners with a level of protection from identity theft. While it’s true an EIN can be stolen, the direct and collateral damage is far less than having one’s identity stolen.
2. Boosts Your Business’s Reputation and Credibility
Online retailers’ identities are often well hidden behind a website, but when you’re dealing with others, you want to put on a professional front. Having an EIN demonstrates you take your business seriously and others you work with (e.g. suppliers) will place stronger trust in you.
3. Gain the Ability to Obtain a Business Bank Account
Most financial institutions require business owners to obtain an EIN before allowing them to open a bank account for their company. While some banks might allow independent owners to open a business bank account with their SSN, this is less common.
Having separate bank accounts for your personal and business financial affairs is also beneficial for many other reasons, especially come tax season, because you can easily pull up your company’s income and expenses, along with seeing specific transactions with ease. This greatly simplifies your bookkeeping and accounting processes.
4. Separates Your Personal and Business Finances
Online sales business owners who register their company as a Sole Proprietor can operate without an EIN.
Operating as an LLC, Partnership, or Corporation provides certain legal and financial protections, but without an EIN to differentiate personal and business finances, the line between the two becomes blurred. This is a problem because to have the protections LLC, Partnership or Corporation enjoy, you must be able to demonstrate a separation between personal and business financials.
Even without being an LLC, it makes sense not to commingle your financials, as it simplifies annual tax returns.
5. Helps you Gain Access to a Business Credit Card/Establish Credit
Once you obtain an EIN to link to your online business, you can begin to build your business credit. The fastest and easiest way to start building a business credit rating is by applying for a business credit card. You can use it to pay for supplies, inventory, or anything else you need. Over time, if you decide to expand your online shop, you’ll have a stronger credit history for your company (separate from your own credit score) and be in a better position to gain access to business loans.
6. Eases the Process of Filing Your Business Taxes
As a self-employed business owner, you are responsible for paying not just your personal taxes, but your business’s taxes as well. By obtaining an EIN, it is much simpler to organize your company’s tax returns. In the long run, no errors equate to no tax penalties or being subjected to an audit, which can be costly and time-consuming.
7. Reserves Your Ability to Hire Employees
At the moment, you may be able to run your online retail company as a solo operation, but what happens if your company experiences sudden growth? You might need to rapidly hire people to handle administrative tasks, assemble products, or perform other tasks. Or, for example, if you sell handmade holiday decorations, you might need seasonal help so you can package and mail your orders on time.
By already having your EIN, you proactively plan to reserve the right to hire employees at any time you need. By law, you cannot hire employees without an EIN, so it doesn’t hurt to have one already in place when you initially open your business.
8. Helps in Setting Up Business Profiles When Using Payment Applications
Online sellers and buyers are usually fairly tech-savvy. If you allow your customers to pay with payment applications, such as Venmo or PayPal, this is often an appealing attribute for people. However, if you cannot separate your payment platforms from your personal banking, this can create problems.
The IRS requires online payment applications to send reports directly to them if payments gross at least $20,000 per year and process 200 payments that same year. In this scenario, the payment processor must issue a 1099-K to the company. Having an EIN in place helps the process go more smoothly and there is no confusion with personal transactions since everything is separate.
Setting up a new business can be difficult because it takes time to set up a business model/decide what to sell, assemble inventory, create a delivery process, market to consumers, and grow a customer base. Having an EIN in place from the beginning helps position the company to be more competitive.