You’ve probably already heard about an Employee Identification Number (EIN) if you’re self-employed. Instructions for starting your own business commonly advise you to complete paperwork like obtaining the appropriate licenses and insurance, along with obtaining an EIN online. Certain businesses may be required to obtain an EIN before they can legally operate, which is generally determined by how that entity pays taxes. Your business may not legally require an EIN when you’re self-employed, but there are many advantages to having one.
Benefits of Getting an EIN when Self-Employed
Self-employed individuals should consider obtaining an EIN, even in cases where they don’t need it. An EIN provides them with advantages that generally stem from its ability to separate business from personal financial affairs. The following list describes nine of the most important benefits for the self-employed:
1. Protect yourself from identity fraud
Identity theft is a growing problem in the US, generally due to the increasing value of Personally Identifiable Information (PII). Using an EIN for your self-employed business avoids the need to provide your SSN to other parties like customers and vendors. While you still don’t want thieves to get your EIN, it’s preferable over allowing them access to your SSN. An EIN is, therefore, an effective means of protecting your SSN.
2. Avoid tax penalties
The payment of business taxes is one of the most compelling reasons to obtain an EIN if you’re self-employed. It’s helpful for both state and federal taxes, whether you file annually as an individual or quarterly as a business. It’s best to obtain an EIN before you actually need it, especially when it comes to tax payments. If you don’t have one by the time you need to file your tax return, you must request an extension from the IRS, along with the date you expect to receive your EIN. Failure to do so can result in penalties for filing your taxes late.
3. Establish business credit
Business credit reports consider many of the same factors as a personal credit report when assessing financial responsibility. In addition to receiving a line of credit, a business’s credit rating also determines its interest rate, among other loan terms. However, a business needs its own identity to establish credit separately from its owner, which may require an EIN depending on the creditor. An EIN helps draw a distinction between these two entities, which is particularly useful when the business owner has poor credit.
4. Establish your credibility
Small business owners need to perform many tasks themselves that would normally be done by different employees in a larger company. For example, they have a greater dependence on suppliers, vendors, and other partners to grow their company. These third parties are often more likely to work with a small business when it has the credibility provided by its own EIN.
Business partners routinely check a business’s credit history before agreeing to work with it, especially a sole proprietorship. A strong credit rating helps establish a business’s credibility and reassures partners that they will receive payments on time. An EIN is a fast, inexpensive way of accomplishing this by showing that the business and its owner are financially separate entities.
Brand reputation is an increasingly important means of differentiating your business from your competitors, especially in industries that don’t compete on price or quality. If you’re self-employed, you’ll typically experience difficulty with your lack of reputation when getting your business off the ground. An EIN helps demonstrate that your business isn’t just a part-time hobby or side hustle. It shows that you’re serious about your business, which is crucial for attracting clients and vendors.
5. Accelerate business loan applications
Growth should be a general goal of all business owners, even if they aren’t actively planning on expanding at the moment. However, small businesses often experience sudden requirements for additional funding, making short processing periods for loans highly useful. When this happens, you’ll want to have an EIN in hand to avoid unnecessary delays to this process.
Among other requirements, lenders want to ensure that a business is legally allowed to conduct operations. In addition, many lenders prefer or even require a business to have an EIN, largely for the purpose of maintaining its own bank account. This requirement allows lenders to review the account’s deposit history to ensure it has the ability to repay the loan. In addition, some lenders want a business to have a separate credit history, especially the Small Business Administration (SBA). An EIN can significantly reduce the time needed to meet these requirements, reducing the time needed to get your loan approved.
6. Establish an individual retirement fund
Self-employed individuals have options for tax-deferred retirement savings, just like regular employees. The most common choices include individual 401(K)s and SEP-IRAs. An individual 401(K) offers many of the same benefits as a traditional 401(K) and allows self-employed workers to contribute up to $64,500 each year, but it requires an EIN. A SEP-IRA allows an annual contribution of 25 percent of their income or $57,000, whichever is less. An SEP-IRA doesn’t legally require an EIN, although most institutions do require one.
7. Get more opportunities overseas
A business must be located in the US or its territories to qualify for an EIN, although its responsible party doesn’t need to be a US citizen. An EIN can be highly beneficial for a non-U.S. citizen without a Social Security number who wants to start a business in the United States. Foreign nationals can obtain an EIN for their business before they even have an SSN, allowing them to apply for business credit. This use of an EIN is particularly helpful for startups that need to achieve a competitive advantage by moving quickly.
8. Separate personal and business finances
Sole proprietorships often use a “pass-through” structure to pay taxes, in which money passes through the proprietor’s personal banking account before it’s deposited into the business account. However, separating business from personal accounts can provide benefits when it comes to paying business taxes. Your tax professional can provide more information on the differences in rates between business and personal taxes.
The separation of finances is a legal requirement when your business has employees, even if you’re self-employed. While you may not have employees when you first get started, there’s a good chance you’ll need to hire staff as your business grows. When that happens, you’ll need to pay payroll and Federal Insurance Contributions Act (FICA) taxes to employees. An EIN allows you to make those payments and ensure you’re credited for the amounts you pay.
9. Obtain business licenses
You’ll often need licenses to operate your small business, which may be required by both the state and federal governments. These may include general licenses needed for any business, in addition to licenses required for specific businesses. An EIN provides government agencies with the information they need about your business and also helps them verify you hold the credentials needed to run your business in accordance with legal requirements.
Apply for an EIN as a Self-Employed Professional
Independent contractors who don’t have a business can also apply for and receive an EIN, as the IRS considers these individuals to be self-employed and, therefore, a type of sole proprietorship. While a sole proprietorship with employees is required to get an EIN, it’s optional for independent contractors without employees. The application process is easily done online.
EINs provide many benefits for a self-employed business, even when it isn’t legally required. Its overall benefit is to separate the self-employed person from their business, which helps protect the individual’s identity. In particular, it eliminates the need for that person to provide their own SSN on many business documents. An EIN also makes a clear distinction between the person and their business, which is desirable for financial reasons such as tax deductions, credit ratings, and loan applications.