Are you confused about Federal Employment Identification Numbers (“EIN”)? You are not alone! Whenever we teach at fabric conferences, we receive at least one question about EINs, usually an emerging designer inquiring as to whether or not she must obtain an EIN number if she has no employees.
We’ve been asked if it was cool to use an existing EIN number to launch a new start-up apparel company. A designer once asked us to explain why the bank rejected her EIN number and refused to open a bank account on her behalf. After a quick fact-finding session, we determined that the designer proffered the filing number stamped on the entity formation documents by the Secretary of State. And no one has knows what is a TIN!
We think it’s time to clear the confusion. Here’s the skinny on EINs plus one very important reason to use an EIN to operate your fashion business.
WHAT IS AN EIN NUMBER?
An EIN is a nine-digit number assigned by the IRS to a business. While there are a myriad of uses, a business mainly uses the EIN to:
- Identify the business to the IRS and others;
- Conduct business;
- File taxes on behalf of the business:
- Make tax payments on behalf of the business;
- Report information to the IRS and other federal and state regulatory agencies.
HOW DOES AN EIN DIFFER FROM A SOCIAL SECURITY NUMBER?
Here’s the difference short and sweet: An EIN number is assigned to a business by the IRS. A social security number (“SSN”) is issued to an individual by the Social Security Administration.
HOW DOES A “TIN” DIFFER FROM AN “EIN”?
On certain occasions, the IRS or other government agency will request the “TIN” in a government form or application.
A “TIN” is the “Taxpayer Identification Number”. The TIN can be either:
- The SSN issued to an individual or
- The EIN issued to a business.
There are also other variations of a TIN. For example, there may be instances when an individual cannot obtain a SSN and the IRS will issue an “Individual Taxpayer Identification Number” (“ITIN”). The ITIN is a tax processing number only available for certain nonresident and resident aliens, their spouses, and dependents that cannot get a SSN.
No need to go into the other types of TINs. For now, just know that if you have a SSN or EIN, use either (as required) when asked for the TIN.
WHO MUST USE AN EIN NUMBER:
You are required to obtain and use an EIN to conduct business, file and pay taxes, etc. if you formed a business entity that is a:
- Partnership (NEVER do this! We will explain why in another blog post) or
- Limited Liability Company.
If you did not form a business entity and are operating as a sole proprietor, you can elect to use your SSN, rather than obtain an EIN for your business (unless you are required by law to do so—see below).
And here we need to make a critical distinction that is often misunderstood. If you filed a fictitious business statement usually known as a “DBA” (Doing Business As) or obtained a business license to operate in your city, you have NOT formed a business entity. While you may have taken these actions to comply with state or local laws, you are still operating your business as a sole proprietor
WHEN MUST A SOLE PROPRETOR USE AN EIN?
As a sole proprietor, you can elect to use an EIN even if you don’t have employees. In fact, certain banking institutions may require you to have an EIN before you can open up a business bank account, apply for a business loan, or even obtain a business line of credit.
Be aware, however, that as your fashion business continues, there may come a time when you are required by law (or other rule) to use an EIN number even though you are still operating as a sole proprietor.
You must have an EIN if you are a sole proprietor and:
- Hire employees
- Have a Keogh or Solo 401(k) retirement plan,
- Buy or inherit an existing business that you operate as a sole proprietorship
- File for bankruptcy.
Lastly, if you form a business entity for your company, you will need to obtain an EIN even if you are the sole shareholder of the corporation or member of the limited liability company.
“THE” REASON TO USE AN EIN: PROTECT YOURSELF
A lot of fashion designers who operate as sole proprietors tell us that they like to keep their business operations simple, and that using an EIN is way too complicated. Here’s why using an EIN number to run your fashion business is worth the extra effort.
Say you paid $600.00 or more for business services to freelancers (think graphic designers, models, photographers, etc.) operating as sole proprietors. You will need to issue a Form 1099 MISC (“1099) to each of them to properly account for the payments made.
Conversely, say you received more than $600.00 or more as payment for business services that you performed. You will receive a 1099 from the payer for whom you performed the services.
This may seem like a routine matter until you consider that both the 1099 that you send out AND the 1099 that you receive will list your SSN. That means that your highly personal and confidential identification number will be received, recorded, duplicated, and most likely passed on to people (accountants, bookkeepers, assistants, etc.) that you have never met and have no idea about their trustworthiness. More importantly, you have no idea how your SSN, even if in digital form, will be safeguarded.
This should be a real concern to you.
Three years ago, the United States Small Business Administration reported that identity theft of small businesses is on the rise. And in June 2014, Entrepreneur reported findings from the 2014 Symantec Internet Security Threat Report that identity theft attacks against small business (fewer than 250 people) skyrocketed from 18 percent in 2011 to 31 percent in 2013.
Using an EIN number may not prevent the theft of your business identity. It may, however, help to prevent you from suffering personally the terrible consequences of having loans or credit cards taken out in your name. Avoiding THAT hassle, safeguarding your personal assets, and protecting yourself is certainly worth the extra effort of using an EIN.
HOW DO I OBTAIN AN EIN?
The IRS has made getting an EIN super simple and pain-free. You can apply directly at the IRS website, www.irs.gov, and use the free online application process to obtain the EIN. If you do apply online, you can request to receive the Form SS-4 as a PDF so that you can receive confirmation of the EIN number immediately. Just remember to print out the Form SS-4 and save it and the PDF in a secure place as it is your official confirmation from the IRS that the EIN was issued. Alternatively, you can also obtain the EIN by mail, fax or phone.
For More Fashion Law Advice:
- Using and Misusing the “Made in USA” Label
- What are FTC Label Requirements?
- What to Know About Non-Disclosure Agreements
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