Legal Definitions - Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to identify business entities in the United States. It functions much like a Social Security Number for an individual, but for a business. Sometimes referred to as a Federal Employer Identification Number (FEIN) or Federal Tax Identification Number (FTIN), this number is permanent and unique to the business it's assigned to; it is never reused, even if the business ceases operations.

Businesses typically apply for an EIN after they are formally established but before they begin day-to-day operations, usually by completing Form SS-4. The IRS uses the EIN primarily for tax administration and compliance.

Businesses need an EIN for several key activities, including:

• Hiring employees and managing payroll.
• Opening business bank accounts and applying for business loans.
• Filing various federal tax returns.

Certain types of business entities are legally required to obtain an EIN, such as:

• Businesses with employees.
• Partnerships and corporations.
• Nonprofit organizations.
• Any business that files excise taxes or withholds taxes on income paid to non-resident aliens.

Examples:

Example 1: A New Bakery Hiring Staff

Sarah decides to open "Sweet Treats Bakery" and plans to hire two bakers and a cashier. Before she can pay her employees, withhold their taxes, or report their wages to the IRS, Sarah must apply for an EIN for Sweet Treats Bakery. This number will be used on all her payroll documents and tax filings related to her employees.

How this illustrates the term: This example demonstrates that a business needs an EIN specifically for the purpose of hiring and managing employees, fulfilling its tax obligations as an employer.

Example 2: A Professional Consulting Partnership

David and Emily, two experienced marketing professionals, decide to form a partnership called "Synergy Marketing Solutions." Even though they initially plan to do all the work themselves and not hire any additional staff, their business structure as a partnership legally requires them to obtain an EIN. This EIN will be used to file their annual partnership tax returns with the IRS, distinguishing their business income and expenses from their personal finances.

How this illustrates the term: This scenario highlights that certain business structures, like partnerships, mandate an EIN for tax filing purposes, irrespective of whether they have employees.

Example 3: A Community Arts Foundation

A group of local artists establishes the "Riverside Arts Foundation," a nonprofit organization dedicated to promoting art education in their town. To open a dedicated bank account for the foundation, apply for grants from other charitable organizations, and eventually file its annual informational returns with the IRS (Form 990), the Riverside Arts Foundation must first secure an EIN. This number establishes its official identity as a nonprofit entity.

How this illustrates the term: This example shows that nonprofit organizations require an EIN not only for tax reporting but also for essential operational activities like banking and securing funding, solidifying their legal and financial identity.