Self-employment can be freeing and exciting, but the adventure comes with a lot of paperwork—from taxes and insurance to bank accounts and purchase orders. One quick but important step, which a lot of freelancers and contractors might skip, involves signing up for an EIN or employer identification number.
If you’re a freelance or gig worker with no plans to employ anyone else, you don’t technically need an EIN, but it’s smart to get one anyway. You’ll reduce your risk of identity theft and look more professional for future clients without spending a cent (did I mention EINs are free?).
What is an EIN?
Everyone who files taxes has an assigned tax identification number or taxpayer ID, a nine-digit number unique to you; it’s how the IRS confirms your identity on forms. Independent contractors also need to use a taxpayer ID to set up payment with new clients. For most people, this number will simply be your Social Security number (SSN).
An EIN is a taxpayer ID for businesses, just like an SSN is a taxpayer ID for individuals. Small business owners use an EIN whenever they need to prove their business’s identity, like when they’re opening a bank account or applying for loans.
But you can qualify for an EIN even if you don’t own a business; as a self-employed worker, you’re considered your own employer. And you aren’t required to use your EIN right away, or at all, once you get one—you can keep it in your back pocket if an EIN becomes useful down the road.
Advantages to getting an EIN
It reduces the risk of SSN identity theft
Taxpayer identity theft is ramping up as more business transactions move online, and identity thieves may use stolen SSNs to open accounts in the victim’s name or file fraudulent tax returns and get the refund. If an SSN is your only tax ID, you’ll need to use it on business registration forms, which are officially public record (meaning anyone can see them if they want).
An EIN can still be intercepted, of course, but the potential damage is much more limited. EINs aren’t linked to personal finances and credit the way SSNs are, and a scammer would have to work a lot harder to open an account with just an EIN.
You can provide your EIN on any business-related form that would normally require your SSN — taxes, invoices, loan applications, etc. And if you ever get a business license, a document that’s usually available to the public, you won’t need to publicly display your SSN.
It helps establish you as a solo entrepreneur
An EIN is useful if you want to take work-related tax deductions, like the elusive home office deduction. The IRS is less likely to flag you for an audit if they see the deductions are for a legitimate business.
This legitimacy is part of the EIN’s appeal—an EIN signals you’re an independent contractor, not an employee, and you’re serious about your venture. Even if you’re just supplementing other income with a side gig, the EIN can help you snag customers, clients, and vendors by immediately establishing you as a professional.
It’s required for business bank accounts
Keeping a separate account for professional finances is a smart move, especially if you have business expenses to track. Most banks need an EIN to open a business checking or savings account even if you’re a sole proprietor.
It develops business credit
Your business has traceable credit just like you do, and lenders and credit agencies use EINs to assess the business’s financial stability. An EIN starts you on the way to a strong business credit history. Every time you use the number to apply for credit and pay responsibly, your business credit score gets a boost.
If you apply for small business loans, which you may consider as your venture expands, lenders see EINS as a sign of creditworthiness (several lenders require them). Vendors, business partners, and others may want to check your business credit before working with you, and an EIN makes this easy.
It qualifies you for certain retirement plans
You need an EIN to open up a solo 401(k) retirement plan — a lucrative investment and one of the better retirement savings options for the self-employed.
Solo 401(k) accounts are available to business owners who have no employees except themselves. The plans come with several perks that you don’t get with a SEP IRA (another common retirement choice for sole proprietors) such as post-tax Roth contributions and higher contribution limits.
EINs are also necessary for Keogh plans, a type of tax-deferred retirement plan open to self-employed individuals.
It lets you hire employees and pay contractors
The IRS requires an EIN before you hire any official employees for your business.
If you mainly deal with suppliers and contractors — people who perform work for you but aren’t technically employees — you’ll still need a tax ID for their 1099 forms, which you’re required to send if you paid them over $600. In this case, an EIN is a much better choice than a Social Security number for privacy reasons.
And if you make wholesale purchases for your business, some wholesale sellers will want your EIN to make sure you’re legit.
It protects personal assets if your business goes bankrupt
If you’re a “plan for the worst-case scenario” kind of person, you’ll be glad to know having a separate business identity — confirmed by an EIN — means your personal assets won’t automatically be in trouble if your venture goes under.
Who needs an EIN?
An EIN is always helpful for sole proprietors, and if any of these circumstances apply to you, an EIN is legally required:
- You hire employees.
- You need federal, state, or local licenses.
- Your business is a partnership or multi-member limited liability company (LLC).
- You file returns for employment taxes, excise taxes, or alcohol, tobacco, and firearms taxes.
- You have a Keogh retirement plan.
- Your business is involved with nonprofit organizations, trusts, estates, farmers’ cooperatives, or another type of organization listed by the IRS here.
How long is an EIN valid?
An EIN, like an SSN, is totally unique. Your nine-digit combination is your “legal fingerprint” that never gets reused for another business, and it’s valid as long as your business lasts (no need to renew annually).
You need a new EIN if your business’s type, ownership, or structure changes significantly — if you incorporate, begin or end a partnership, form an LLC, purchase an existing business, or enter bankruptcy proceedings. Name and location changes don’t require new EINs.
How do you get an EIN?
Fortunately, the IRS has a simple, rapid process for EIN applications. They’ll issue the EIN immediately after your application is validated, and you’ll get a confirmation notice to download.
Before you start the online form, though, the IRS highly recommends you take a look at the print version (otherwise known as Form SS-4) and compile all the correct info first. Once the online application gets rolling, you have to complete it within a single session: you can’t save the information and come back later.
Does an EIN cost money?
No, EINs are free to apply for and use. Any website or service charging you money for an EIN is illegitimate, so stick with the IRS site.
You are, however, limited to one EIN application a day (for anyone who needs multiple EINs).
What information do you need?
The application asks for basic stats on your venture, including:
- Type of entity (sole proprietorship, partnership, etc.).
- Service your business provides (you can write in a description on the form if necessary).
- Date your business began.
- Reason for applying (starting a new business, hiring employees, banking, creating a trust, etc. — you can state your own reason if necessary).
- Name and SSN of the “responsible party” or the individual who owns, operates, and controls the business (usually that’s just you). In a partnership or jointly owned business, pick one person for the application.
When can you start using the EIN?
You’ll get an EIN immediately after the online application if you qualify, and you can use the number right away for tasks like opening bank accounts and getting business licenses.
But new EINs take two weeks to enter permanent IRS records, so you’ll have to wait a couple of weeks before using it for electronic tax activity (filing returns, making payments, etc.). In the meantime, the IRS should send mail confirmation, including directions for using their electronic payment system.
What if you forget your EIN?
A new ID number takes a while to commit to memory. Once you get confirmation of your EIN, store the (physical or digital) notice in a secure spot — maybe with your tax records — so you know where to find it.
The IRS will remember if you forget; call their Business & Specialty Tax Line at 1-800-829-4933 and answer some security questions for a reminder. Or check your bank records and any previous paperwork you’ve filed using the number.
Anyone who’s self-employed, even on a freelance or contract basis, can apply for an EIN.
Make sure to get the application in at least two weeks before you plan to file taxes, keep track of the number once you receive it, and get in the habit of putting your EIN instead of your Social Security number as a tax ID on any forms that allow it. The new number should make your life easier down the line, and it may help grow your business.