Do I Need an EIN for a Sole Proprietorship?

A sole proprietorship is an easy and inexpensive way to start a business of your own. Once you secure any local or state permits required, you’re pretty much ready to go.However, you may have heard of something called an EIN, or employer identification number, and wondered if it’s necessary as a newly established sole proprietor.

Let’s review what is an EIN , and go over the details of whether it’s worth the trouble of attaining one or not.

Good Reasons to Apply for an EIN  

An Employer Identification Number (EIN) is assigned by the Internal Revenue Service (IRS) and is used to identify different types of business entities. This number is like a social security number for a business; it’s specific to a single entity, and can be used on personal tax returns to organize certain credits, deductions, and loses. It can also be used to collect payments from clients in lieu of providing a social security number.

If you plan to work for yourself, it’s a good idea to establish some kind of personal savings plan or retirement fund, since you’re not collecting that benefit from an employer. Some independent savings plans will require an EIN when it comes time to report it on your personal tax return.

Another good reason to apply for an EIN is if/when you hire employees. This is another case where an EIN is legally necessary.

Reasons Not to Apply for an EIN 

While there are several good reasons to apply for an EIN, depending on the nature of your business, it may not be entirely necessary. In this instance, the sole proprietor uses his or her social security number instead of an EIN on a tax return.

It doesn’t hurt to be proactive about obtaining an EIN. While some sole proprietors may not need an EIN, it might be better to have one at the ready than not to have one at all.

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