TIN or EIN? How to Choose Your IRS Tax Identification Number

Get help figuring out what type of tax identification number you need and should use when conducting business.

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TIN or EIN? How to Choose Your IRS Tax Identification Number

No one likes filing taxes, and it can be challenging to know what the Internal Revenue Service (IRS) demands. One fact is that they require all businesses to identify themselves with the IRS through their TIN. So, essentially, your choice of business entity determines the type of tax identification number you will use.

If you’re just starting, you can use a Taxpayer Identification Number (TIN) or an Employer Identification Number (EIN), depending on what type of company you establish. Understanding the difference between a TIN and an EIN can help, and despite both being used by the government to keep tax records within the United States, they’re not the same thing.

What is the difference between a TIN and an EIN?

A TIN is usually associated with an individual’s Social Security Number (SSN), but it can also be issued if someone does not have one. The TIN only allows you to file as a taxpayer and is the umbrella term under which all tax-paying entities identify themselves. This 9-digit identification number used by the IRS is issued either by the Social Security Administration (SSA) or by the IRS. Different types of TINs include:

  • EIN
  • Individual Taxpayer Identification Number (ITIN)
  • Taxpayer Identification Number for Pending U.S. Adoptions (ATIN)
  • Preparer Taxpayer Identification Number (PTIN)
  • SSN

The SSA issues only SSNs, whereas the IRS issues all other TINs. Your SSN only allows you to report personal income, where an EIN can be used for reporting wages and salaries, so the choice of TIN depends on your circumstances.

EINs are common for businesses, although you can use your SSN if you’re a sole proprietor or in a partnership.

The most common type is an EIN used for business returns. The EIN is for unincorporated businesses with or without employees, while the Social Security Number (SSN) is for sole proprietorships and partnerships. With an EIN, a company or organization can set up a local tax ID number for their business to file federal taxes. Think of an EIN as an SSN for your company. This means that if your business has multiple entities or operates in different states, each entity will need its own EIN.

Which one should I use?

Regardless of the size or number of employees, most businesses need an EIN. However, if you’re a sole proprietor, you may decide against using an EIN because you don’t necessarily need one. You might opt instead to go with your SSN. The danger is exposure to identity theft and other financial risks when using your SSN on business documents.

Why do I need an EIN?

There are many reasons to get an EIN, but the single most important one is protecting your identity. Using an EIN, you won’t need to disclose your SSN anywhere, which means you’re protected from identity theft. Furthermore, an EIN also makes you look professional; you’re telling your clients that this is your full-time business, not a side hustle.

An EIN keeps your personal and business finances separate.

Let us not forget the EIN keeps your personal and business finances separate. You will be responsible for paying taxes for your business and if you need any licenses, want to establish a credit line for your business, you’ll need an EIN. In addition, it is much harder to start a business without an EIN, as it will be impossible to open a bank account or apply for loans without one. Make the lending process easier as lenders can easily find your company’s information.

What happens if I get my tax identification number wrong?

Some common tax errors using an incorrect TIN include:

  • Failing to file
  • Filing with a missing/incorrect TIN (or other missing or incorrect information)
  • Untimely filing
  • Using the wrong format when filing
  • Any combination of the above

Only the highest penalty will be imposed if you make more than one error. For instance, if one correction costs $50 and another correction costs $280, only the $280 fine will be applied. Even if you’re granted an exception, a late correction penalty can still be levied against your business. The maximum penalty depends on the calendar year the return must be filed, but you’ll want to review Section VIII on the IRS website for additional information.

Using an incorrect tax ID number when filing your taxes can result in a penalty.

While everyone makes mistakes, there are no maximum penalty limitations for intentional failures. The good news is that you can correct any misfilings with the 1040-X as long as you explain any changes and update your filing status.

How can I get an EIN?

Before applying for an EIN, you should determine your business structure for tax purposes. The application will ask if you want to register as a partnership, corporation, or limited liability company (LLC). Still uncertain? The Small Business Administration (SBA) offers guidance and the pros and cons of each business structure. Then determine what type of business you want to establish. If you need help choosing the correct TIN for your business, we highly recommend research, understanding what requirements may apply, and reaching out to a tax professional.

Getting one is not as complicated as you might think. It’s easy to apply for and can be done free of charge via the IRS website. Don’t be fooled into paying a third party to do this for you. Most new businesses will require only 10 minutes to set up, and all you’ll need is the EIN application form: SS-4. The IRS recommends that you apply online for both expediency and accuracy. Lastly, enter your information, and voila, you have an EIN.

Congratulations! You now have your own IRS tax identification number

The EIN is a vital piece of the puzzle that can protect your company from fraud. In addition, you can manage your books by providing you with an official identification number. With that EIN, there is no need to worry about fraud because the only person who has access to this number is you. As a result, you can take care of all of your business needs but make sure you file correctly, or you might be getting an unexpected call from Uncle Sam. 

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