Home health care businesses allow their owners to earn a living while also making a difference in others’ lives through medical or non-medical care. Both roles are essential for people with age-related conditions, disabilities, illnesses, and injuries.
Building a home health care business involves a lot of hard work, including tasks common to all businesses, like attracting clients and administration. In the case of home health care, business owners must also obtain the necessary licenses for both the business itself and its employees. In addition, businesses must pay income taxes with a unique tax identifier (TID), which is generally the owner’s own social security number (SSN) or by obtaining an employer identification number (EIN).
An EIN is like an SSN for a business in that it allows the IRS and other organizations to easily identify a legal entity and can be obtained online. Like an SSN, an EIN is a unique 9-digit number that can be used as a TID when filing taxes. In addition, a business with an EIN can also use it for other tax purposes like submitting form W-4s for its employees when processing payroll. This article discusses the benefits of an EIN over an SSN for a home health care business.
Market Outlook
The outlook for home health care services is extremely promising, largely due to medical advances and an aging population. The BLS reports that this sector had 3,961,900 jobs in the US during 2023, with another 820,500 jobs expected to be added between 2023 and 2033. This increase is a 21 percent growth rate, much higher than the overall job growth rate expected for this period.
Do I need an EIN for my home health care business?
Several factors determine whether an EIN is legally required for a home health care business. Any business with employees other than the owner must have an EIN. A sole proprietorship or business with the owner as the only employee probably doesn’t need an EIN, provided none of the other conditions apply. There are still many benefits for the Self-Employed to obtain an EIN. For example, a business owner with a Keogh plan or solo 401(k) savings plan for retirement will need an EIN to file taxes. In addition, a business that withholds taxes on income other than wages will need an EIN if it pays that income to a non-resident alien.
It’s a good idea to review your business with an attorney or professional tax expert to determine if your business needs an EIN. At the same time, these professionals can also assist you with other details in setting up your home health care business, such as necessary licenses, certifications, liability insurance, and HIPAA compliance. Even in cases where a business isn’t legally required to have an EIN, it still offers the following five benefits:
1. Identity Protection
Identity theft is a growing problem for everyone, especially in the United States. Using an EIN to file taxes can help prevent malicious actors from obtaining your SSN, which is a particularly high risk in health care. This industry is already an attractive target for identity thieves due to the abundance of personally identifiable information (PII) that health care businesses already store, manage, and process. As a result, businesses in this sector are more likely than others to experience a data breach that compromises PII.
Even when a home health care business doesn’t provide medical care, it still needs to provide a TID on multiple documents like tax returns, billing documents, insurance paperwork and certain types of financial transactions. Many of these records are public-facing, making them easy for anyone to obtain. Without an EIN, a business generally must use the owner’s SSN.
While a security breach of your business is certainly undesirable, it isn’t nearly as bad as a compromised SSN. Each time you use your SSN as a TID, it creates another opportunity for your SSN to be compromised. In addition, a small business is less likely to have the cybersecurity needed to protect its information from hacking attempts. Furthermore, the vendors you provide your TID to, may lack the security posture for protecting PII.
2. Separation of Personal and Business Transactions
Using an EIN for your business draws a clear distinction between your business and personal financial transactions. An EIN also allows you to open a business bank account more easily and eliminates the need to co-mingle your funds, which can create tax issues such as increasing the risk of an IRS audit. Another advantage of using an EIN for your business is that it allows you to register it as a single-member LLC rather than a sole proprietorship. An LLC requires you to separate your personal and business transactions, which provides additional financial and legal protection lacking in a sole proprietorship.
3. Development of Business Credit
Businesses have a credit rating, just like individuals. An EIN allows your home health care business to obtain a loan and line of credit under its own name and independently of your personal credit standing. Once you establish your company’s own credit, you can use it to grow its business. A strong credit rating also allows your business to obtain more favorable terms when it needs to borrow money.
It’s quite common for home health care businesses to experience volatile cash flow, especially when just starting out. This problem is often the result of fluctuating market demands, especially when combined with the normal delays in receiving reimbursement from insurance companies and client payments. Good business credit is essential for handling cash shortages needed to operate your business.
4. Establish Credibility for Your Home Health Care Business
New home health care businesses routinely struggle to obtain new clients because they’re unknown entities. The lack of an EIN for your home health care business can pose an additional barrier to establishing the reputation needed to build trust with prospective clients. Blending your business and personal identity can cause them to believe you are committed to your business, while the distinct separation of using an EIN for your business can make clients take you more seriously. It’s especially important for owners of small businesses to appreciate the professionalism that an EIN provides. In particular, players in the healthcare sector need an EIN to prevent their businesses from looking amateurish.
5. Create Continuity and Growth
An EIN can help you position your home health care business for continued growth in a variety of ways. For example, access to business credit allows you to scale your operations by buying software, such as scheduling applications, electronic health record (EHR) systems, and telehealth software. In addition, these solutions require the ongoing cost of hardware to support them, whether you use the cloud or an in-house data center.
Even if you’re self-employed at the moment, your business may experience a sudden need to add staff to meet client requirements. Having an EIN already available allows you to immediately fill roles for your home health care business, such as billing specialists, coding experts, drivers, and receptionists. The legal requirement for an EIN when your company has employees could otherwise restrict your company’s growth.
An EIN’s ability to build business credit allows you to obtain favorable loan terms, which is especially useful when you need to expand quickly. If this occurs, you may want to acquire more office staff and equipment without waiting to obtain an EIN. A home health care business may involve frequent travel, making a vehicle a common requirement in this sector.
Any small business should be prepared for dramatic fluctuations in workflow based on market demand, which an EIN can help you with. If your business experiences an increase in demand, you need to be able to meet it to build your brand. If demand decreases, you need additional funding to support you until business picks up again. Either way, the business credit that an EIN can help provide is an essential resource.
How to Get an EIN
The IRS requires details about you and your company before it can issue an EIN. This information includes your business’s legal and its “doing business” (DBA) name if it doesn’t operate under its legal name. This situation often occurs when your brand is already built around another name. You also need to provide your company’s physical address, not its mailing address. Additional details about your company include its registered business structure, such as a sole proprietorship or LLC.
The IRS also requires information about the person responsible for the company, including name and SSN. Furthermore, you’ll need to provide the date you began providing home health care services and the reason you want an EIN.
Conclusion
Home health care services are currently in high demand, a trend that should continue for the foreseeable future. In addition to the financial benefits, owning and operating a business in this sector can be highly rewarding on a personal level. However, home health care also requires licenses and certifications for both the business and its employees. The process of starting a business in this field should also include obtaining an EIN to help you track its financial transactions and taxes.