Handyman businesses are in high demand and most are sole proprietorships, so they may not require an Employer Identification Number (EIN). However, even in these cases, handyman businesses can still benefit from an applying for a tax ID/EIN. This line of work is popular because houses require regular maintenance, and few homeowners are willing and able to do all the repairs they need. This post discusses nine of the most important advantages of having an EIN as a handyman.
1. Privacy
Identity theft is a growing threat in today’s society. This is largely due to the ever-increasing value of data, especially Personally Identifiable Information (PII) like SSNs. A handyman business routinely needs to provide a TIN on a variety of documents like applications for business loans and credit, sales tax invoices, 1099 forms and W-9.
Without an EIN, business owners must provide their own SSN to a variety of entities such as customers, suppliers and other vendors. This practice greatly increases the risk of a malicious actor obtaining the SSN, whether it’s someone the handyman works with directly or someone who obtains the SSN from one of those parties. This situation can occur through simple negligence or intentionally disclosing the SSN, often by selling it.
A malicious actor who is sufficiently skilled can use an SSN to obtain many other types of PII for that person, including bank accounts and credit card numbers. From there, the actor can access funds and commit other forms of identity theft. An EIN poses a much lower risk for a handyman because it represents the business rather than the individual. As a result, using an EIN is preferable to an SSN, even when a handyman business isn’t legally required to have one.
2. Separation of Personal and Business Finances
An EIN is highly useful for separating the finances of a business from the individual business owner, regardless of business structure. Many handyman services are operated as a sole proprietorship that probably isn’t legally required to have an EIN. However, even in these cases, an EIN helps protect the proprietor’s personal funds from the business’s financial responsibilities.
For business structures like a Limited Liability Company (LLC), a handyman business is legally required to have an EIN. A handyman business is often structured as an LLC, even when that business only consists of one person. The primary reason for doing so is that an LLC provides greater protection from legal and financial liabilities than a sole proprietorship. However, these protections require a clear separation between personal and business finances. An EIN is a key component for achieving this distinction.
3. Tracking Business Expenses
An EIN for a handyman business also facilitates accounting and bookkeeping processes. This benefit is largely the result of simplifying tax returns, reducing the time needed to complete this task. In addition, an EIN can reduce business taxes by helping the preparer easily identify business transactions, especially for the purpose of declaring tax deductions. For example, handyman services often make significant purchases of equipment, which are generally tax-deductible.
4. Expanding Operations
Handyman businesses typically start out very small, often as just one person doing simple chores for neighbors. As a result, this type of business is often run by a single person while it’s getting off the ground. However, the company will need to expand the scope of its operations to provide reliable revenue.
This process generally involves increasing the customer base, which will eventually require adding employees. In addition to more workers in the field, a handyman business will need to hire specialized staff to perform administrative tasks. Adding additional vehicles and other equipment is another aspect of expansion for a handyman business. Furthermore, the business will typically offer benefits like retirement accounts and health insurance to its employees.
All of these activities will require an EIN at some point. It’s good practice to obtain an EIN before you actually need it, allowing you to quickly make business decisions in response to sudden changes in market conditions.
5. Establish Business Credit
An EIN helps to show that a handyman business is a separate financial entity from its owner, which is a key consideration for most creditors. A lack of credit is particularly problematic for handyman businesses, which often need to purchase substantial materials when starting a project.
Any business should work to establish and maintain its credit, just like an individual. This process often proves challenging in the beginning when the business has no credit history of its own. In addition to creating a separate credit history, a business must also pay its debts on time to achieve a high credit score.
6. Accelerate Business Loan Applications
An EIN helps demonstrate to lenders that you take your business seriously rather than treating it as a paid hobby. Many financial institutions need a business to have an EIN before they consider lending it money, although this isn’t a legal requirement. An EIN allows lenders to easily look up your business’s credit history, which is a major component of approving a business loan. However, obtaining this benefit means that you need to get the EIN and establish your business’s credit history before applying for a loan.
7. Open a Business Bank Account More Easily
Many financial institutions require an EIN to open an account for a handyman business. Some institutions will also accept an SSN for a business bank account, depending on their individual policy. Again, it’s usually better to use an EIN even when it isn’t required, as it serves to distinguish between business and personal finances. In the case of separate bank accounts, an EIN also allows you to track financial transactions separately. This benefit is especially useful for handyman businesses, which need to easily identify the many purchases of materials as business transactions.
8. Open Individual Retirement Accounts
Independent contractors like handymen aren’t able to contribute to a traditional employer-sponsored retirement plan like a regular employee. Instead, they must contribute to an individual retirement account like a 401(k) plan or a SEP-IRA. In the case of an individual 401(k), an EIN is legally required. For a SEP-IRA, an EIN isn’t a legal requirement, but most financial institutions will require one to open this type of retirement account.
9. Brand Promotion
A small handyman business routinely relies on word-of-mouth advertising, especially in the beginning. During this period, it’s especially important to appear as professional as possible. One way to accomplish this is to use an EIN instead of an SSN, making your handyman services look more like a legitimate business. In addition to attracting more customers, this type of brand promotion helps build trust with suppliers, vendors, and partners.
As a handyman business expands, an EIN becomes more important for establishing its reputation. This is especially true when doing work for another business, rather than maintaining the residence of an individual homeowner. For commercial projects, clients routinely require a handyman business to have an EIN.
More explanation of what an EIN is
An EIN is also known by other names, like a Federal Employer Identification Number (FEIN) and Federal Tax Identification Number (FTIN), depending on its specific use. It’s a type of Tax Identification Number (TIN), like a Social Security Number (SSN). Both of these TINs are unique nine-digit numbers that the Internal Revenue Service (IRS) assigns to tax-paying entities operating in the US. However, an SSN is assigned to individuals, while an EIN is assigned to business entities.
Summary
IBIS World reports that 522,837 handyman businesses existed in the US during 2023, marking a 0.7 percent increase over the previous year. This makes for an opportunity for expanding and hiring employees. This requires a handyman business to have an EIN,. Even when it isn’t a legal requirement, an EIN still makes it easier for a handyman to run a business, generally because it establishes the business as a separate entity from the owner. In addition to facilitating tax returns, the advantages of an EIN include faster applications for loans and bank accounts. Greater expansion potential is also a significant incentive for a small handyman business to have an EIN.