Mental health practitioners may work in a variety of practices, from a solo practice founded by one practitioner to an established practice that employs many counselors and therapists. Regardless of size, an Employment Identification Number (EIN) provides many benefits for these businesses and can be obtained online. This post discusses five of the most important benefits of a therapist EIN.
Benefits for a Therapist to obtain an EIN
Therapists should consider using an EIN, even when it isn’t legally required as a Sole Proprietor. This business decision provides multiple benefits that generally stem from an EIN’s ability to distinguish between the practice and the individual therapist.
1. Meet Legal Requirements
Certain types of practices are required to use an EIN when filing tax returns. This requirement applies to any practice with employees, even when the only employee is the business owner. This situation can occur when a therapist sets up their practice as a Limited Liability Company (LLC) with the therapist as an employee of the LLC.
Businesses that declare certain types of income may also be required to use an EIN, including income that’s taxable such as tobacco, alcohol, or firearms. In addition, businesses need to file tax returns with an EIN if they pay excise or employment taxes, which can occur even when the business has no employees. For example, a business must withhold taxes on income other than wages when paying non-resident aliens, regardless of their employment status.
Additional conditions that require a business to have an EIN include those that are structured as corporations or certain partnerships. These partnerships include, but aren’t limited to, non-profit organizations, estates, and trusts. Furthermore, a business that offers a Keogh plan for retirement savings must file tax returns with an EIN. On the other hand, a single-person practice such as a sole proprietorship will typically be able to file taxes under that person’s SSN.
2. Protection from Identity Theft
The US Bureau of Justice Services reported in 2021 that ten percent of all people in the US were victims of identity theft during the previous year, which is about 24 million people. In addition, 22 percent of Americans have been a victim of identity theft at some point in their lives. An SSN is a particularly valuable piece of Personally Identifiable Information (PII) for a malicious actor and, therefore, one of the most commonly traded forms of PII on the dark web. A skilled identity thief who obtains someone’s SSN can generally use it to obtain all of their other PII, including bank account and credit card numbers.
Using an EIN generally protects business owners from identity theft by eliminating the need to provide their own SSNs on tax documents. However, this practice offers additional protection for mental health professionals, making it much more preferable for them to use an EIN. For example, a therapist must provide a TIN on insurance forms. In cases involving out-of-network billing, therapists who use their SSN will end up disclosing their SSN to their own patients via their superbill.
Another risk for therapists who use their SSN relates to the Transparency in Coverage, which was recently enacted in the US. Complying with this rule could result in public disclosure of the therapist’s SSN under certain circumstances. Disclosure of a practice’s EIN is preferable to the disclosure of a therapist’s own SSN because an SSN can lead thieves to the therapist’s own PII, while the EIN will only lead them to information about the practice.
3. Open a Business Bank Account
Therapists who operate as sole proprietors may be able to open a bank for their business with their SSNs, but there are multiple reasons to use an EIN instead. For example, individual financial institutions may have policies mandating an EIN for a business account, even in cases where it isn’t a legal requirement.
Using an EIN to open a business bank account helps separate the funds of the business from those of the therapist. Eliminating the commingling of these funds reduces the risk of IRS audits and other financial problems. Assume, for example, that a therapist registers their private practice as an LLC. This business structure normally provides additional financial and legal protection over a sole proprietorship, but failing to separate business and personal funds risks losing these benefits.
4. Facilitate Expansion
Mental health professionals often work by themselves from their homes, at least at the beginning of establishing a private practice. However, they will eventually need to expand their practice if it becomes successful. An EIN can assist with this process in a number of ways, but you should obtain one before you actually need it. Once the EIN is in place, a therapist can begin the process of separating business and personal finances.
For example, an EIN can provide easier access to funding, allowing a practice to expand when it needs to. A new practice often experiences a sudden need for more office space, equipment, or other types of expenses that support business growth. In addition, an EIN is a legal requirement for hiring employees, which a practice will eventually need to do to continue growing. Common positions for new employees in a practice include receptionists and bookkeepers, along with additional practitioners.
5. Establish Business Credit
Even small practices need credit to make purchases, even if it’s just a few office supplies. Therapists often use their personal funds for this purpose at first, but a practice should acquire its own credit as soon as possible. Separate business credit is desirable because it protects the therapist in the event the practice runs into financial trouble and vice versa.
Some creditors require an EIN before extending credit to a business. Even in cases where the creditor doesn’t require an EIN, it can expedite the application process because it shows a separate credit history for the business. This practice allows creditors to easily review a practice’s credit history without the need to determine whether a given transaction belongs to the therapist or practice.
6. Promotes the Practice’s Reputation
A therapist operating as a sole practitioner must routinely rely on other parties, even when they aren’t employees. These entities include accountants, cybersecurity services and virtual assistants, all of whom will need the practice’s TIN to use on their tax forms. No matter how professional the therapist is, using an SSN makes the practice appear amateurish, which could make some businesses hesitant to work with it.
Furthermore, a practice’s TIN may become publicly available under healthcare transparency laws, allowing clients to quickly determine whether a practice is using an EIN or SSN. A therapist can also improve their practice’s credibility by converting a sole proprietorship to an LLC, which requires an EIN. Obtaining an EIN beforehand allows this process to proceed more quickly.
7. Open Retirement Accounts
Employees routinely have access to employer-sponsored retirement accounts, which typically offer tax-deferred savings. However, self-employed therapists don’t have this opportunity to fund their retirement, requiring them to explore other options. For example, they can set up an individual 401(k), but it requires the practice to use an EIN. A SEP-IRA is another possibility, which an EIN is not required by the federal government to set up. However, some financial institutions do require an EIN when setting up a SEP-IRA.
EIN Overview
The Internal Revenue Service (IRS) requires all businesses to file tax returns, even when no taxes are actually due. It uses unique nine-digit Tax Identification Numbers (TINs) to identify these entities, although many types of TINs exist. For example, both EINs and Social Security Numbers (SSNs) are types of TINs. However, EINs identify businesses, while SSNs identify individuals. Since all TINs are nine-digit numbers, the IRS uses formatting via hyphens to identify each type of TIN. For example, an EIN is formatted as XX-XXXXXXX, while an SSN is formatted as XXX-XX-XXXX.
Summary
Mental health occupations are growing rapidly in the US, largely due to an increased awareness of the societal impact of mental health conditions. The US Bureau of Labor Statistics reports that all jobs in this field are expected to increase significantly faster than the average growth rate of three percent for all occupations for the period of 2024 to 2032. Therapists who deal with substance abuse and behavioral disorders should experience the highest growth rate of 18 percent during this period.
Therapists frequently start a solo practice as soon as they obtain the necessary licenses, often by conducting sessions in their own homes. This strategy provides advantages like minimizing startup expenses, especially the cost of office space. It’s tempting to operate a practice as a sole proprietorship due to the lack of overhead, but even this basic business structure can benefit from an EIN.
This type of TIN offers benefits over an SSN that include legal compliance with more complex business structures, even though it may not be currently necessary. Protection from identity theft is one of the most important advantages of an EIN for therapists, as it eliminates the need for them to disclose their own SSN to various parties. An EIN’s ability to distinguish between solo therapists and their practices also helps protect them from their business’s financial liabilities. In addition, an EIN allows therapists to build credit and secure loans more easily.