In this video, you will get answers to these questions: What’s the difference between an EIN, tax ID, and a
social security number? That’s the question I’m answering today. I’m Aaron Hall, an attorney for business owners in Minnesota. I was asked this question the other day, and I thought, you know what, that would be a helpful video because there’s a lot of ambiguity around EINs, social security numbers, and the term, tax ID. Now let’s talk about EIN. It stands for employer identification number. It’s issued by the IRS. The EIN or employer identification number is given to businesses and
trusts, regardless of whether they’re actually employers. It’s basically saying, this is the tax number for a business or for a trust. So that’s an EIN. Individuals, we have a tax number, it’s our social security number. That’s given to us when we’re born, and that social security number applies to each individual. Originally, individuals were going to be part of the social security program, but now it’s essentially used as a tax identification number. And now let’s talk about the term tax
ID number or tax identification number. Tax identification number encompasses both an EIN and a social security number. So for example, let’s say you want to open up a bank account, the bank will say, “Please enter your tax ID number here.” Well, if the account is under the name of an individual, you use your social security number. If the account is under the name of a business, like an LLC or a corporation, you’ll use your EIN number for the business. That is how the government keeps track of
which accounts are owned by an LLC, a corporation, an individual, et cetera. Keep in mind then that companies, businesses, financial organizations, will report to the government, in particular, the IRS significant transactions and information about these accounts. That for example is how the IRS may know that an audit is needed. If there has been $100,000 received in an LLCs account, and the bank reports that information to the IRS, under that EIN number, the IRS computer systems will say, “All right, was there a tax return for this EIN number? If no, hey, what are we going to do about that?” And the IRS may take action based on that. So, tax ID numbers include EINs for businesses and trusts and security numbers for individuals. And it is information that you put on accounts or use to identify the individual or entity that maybe owns an account or owns some other asset. All right, so there you have it. That explains the difference between an EIN, tax ID number, and social security number. For more information about topics like this, you can see the link to my website at aaronhall.com, which is in the description below. If you find these sorts of videos are helpful and you’re interested in more, you’re welcome to subscribe. And if you have any questions, feel free to add them in the discussion section below. Thanks for joining me here today. A social security number (SSN) is a tax code used by an individual, while a tax ID is a nine-digit tax code for a business entity. For a business entity, a tax ID is usually called an EIN. Just like an individual uses their social security number to uniquely identify themselves on their tax paperwork, a business entity uses it in the same way. It is a unique way for a business to be identified by the IRS on their tax forms. To file taxes as a business instead of an individual, a tax ID is required. A tax ID number is necessary for tax forms and when business owners open a business account through a bank. Sometimes, suppliers and customers also need it to create an account with the business. Small business owner are sometimes unsure if they need a tax ID number. Almost all businesses need a tax ID number. Also, if a small business is associated with certain organizations, it may be required to apply for a tax ID. Here are some examples of those associated organizations:
However, not every business entity needs a tax ID number. An exception is a sole proprietor with no employees and no plans to hire employees. In this case, the sole proprietor can use their own personal social security number as a tax identification number because the person and the business are the same. Sole proprietors who do plan on hiring employees or have already hired employees are required to have a tax ID number, however. If you own a business, chances are you will need a tax ID in order to file taxes as a business as opposed to an individual. There are some exceptions, like some sole proprietors, but most fall under the category that requires a unique business identification code. You can easily get your tax ID through GovDocFiling. Click here to start! ITIN Tax IDs Although EINs and social security numbers are the types of tax IDs most discussed, there is a third type: individual taxpayer identification number, also known as ITIN. This is also a nine-digit number provided to individuals for taxpaying purposes. However, it differs in one main way: it is for those who are ineligible for social security numbers, which are generally immigrants or foreign nationals. Generally, this includes:
Having an ITIN does not allow one to work; its purpose is for foreigners to file income taxes as required by law. An example might include a foreign individual that conducts business on U.S. soil that must file income tax on this business. Because this individual does not have a social security number, he or she will need to file for an ITIN instead in order to then file a tax return. However, businesses filing taxes in the U.S., even if their headquarters are abroad, will still have an EIN rather than an ITIN. Format of a Tax ID Tax IDs are nine digits long, but each category has a different format. A social security number will have the format of three numbers, a dash, two numbers, a dash, and the final four numbers, so it looks like XXX-XX-XXXX. An EIN number still has nine digits, but it follows a format that has two numbers, a dash, and the seven other numbers. It will look like XX-XXXXXXX. An ITIN will follow a similar format to a social security number, except it will always start with 9, and the second set of numbers in the range of 70-99. Basically, the difference between a tax ID and social security numbers is the type of entity that applies for them. Businesses apply for EIN, while individuals use social security numbers, other than certain immigrants and foreign nationals who use an ITIN. If you own a business, chances are you will need a tax ID in order to file taxes as a business as opposed to an individual. There are some exceptions, like some sole proprietors, but most fall under the category that requires a unique business identification code. You can easily get your tax ID through GovDocFiling. Click here to start! |
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