“Do I need to apply for a Sales Tax number?” is one of the questions that every seller asks at some point, most often followed closely by “…and, um, what exactly is it for?”.
It can be difficult to figure out exactly what this mysterious IRS number is and why you should have one.
In this post, we’ll take a walk through how the whole Sales Tax ID system works and why this number can be useful to your small business.
What is a Sales Tax Number?
Let’s start with what this number actually is. A “Sales Tax Number” is often also known as a Federal Tax Identification Number or an EIN and is used by the IRS to identify your company for tax purposes.
Essentially, you’ll want to think of this number much like a social security number for your business. Banks and other financial institutions also will sometimes request this number from you.
There is no difference between a Sales Tax Number, a Sales Tax ID or an EIN - they are exactly the same thing.
The IRS name is actually an EIN, which stands for “Employer Identification Number”.
EINs were originally a number used by the IRS to identify employees of companies however the usage of this number has expanded and is now used for many different types of businesses.
Once assigned to your business, your EIN will be available for the total life of your business and should be provided on all quarterly and annual tax documents, as well as any payments you make directly to the IRS.
Who needs an EIN?
You will most likely require an EIN if you:
- Are based in the US or any US territory
- Have started a new business, trust, corporation or LLC
- Are about to open a bank account that requires an EIN
- Need to create a line of credit or business bank account
- Have a Keogh Plan (retirement plan)
- Have hired or about to hire employees (including household ones)
- Have changed the structure of your business (i.e. switched from sole proprietorship to incorporated)
Why should small businesses have an EIN?
As most small businesses operate under either sole proprietors and partnerships, it is usually not absolutely necessary to have an EIN.
The reason is that with these business structures you usually file business activity directly through your personal business tax returns (i.e. 1040 & Schedule C) so have no need for an additional identifier for your business - this is otherwise known as a “pass through” structure.
Not exactly sure if you are a sole proprietor or something else? We break down the most common small business structures here: Choosing the right structure for your small maker business »
If you are a sole prop or partnership, you’ll instead mainly use your SSN to identify yourself so there is usually no need for any additional numbers apart from some specific cases.
A couple of situations where you will need an EIN for a sole proprietor business is if you plan to have employees, a Keogh Plan (retirement plan for self employed people), need to withhold wages to non-resident aliens or need to open a business bank account that requires this number.
However saying this, any business can apply and be granted an EIN so it can be a good idea to have one anyway. Why? The biggest reason is to be able to use your EIN on paperwork instead of your SSN and thus help protect your own personal details.
It’s completely a matter of personal choice, however as there is no cost to apply for an EIN and it takes almost no time at all to go through the process so you might as well get one.
How do I apply for an EIN?
Tax numbers can be easily applied for online via the IRS website here: Apply for an EIN Tax ID Number and you’ll receive the number instantly.
Tip: One (annoying and quite frankly bizarre) thing to note is that the EIN application form is only available during these specific hours: Monday to Friday, 7 a.m. to 10 p.m. Eastern Standard Time. If you attempt to apply outside of these hours, the form will not be loaded an a message asking you to come back later will be displayed (hey, what did you expect from the IRS? ;).
It’s wise to gather up the documents you are likely to need before you start the application form as you’ll need to complete the whole form in one session and it times out after 15 mins of inactivity (no saving and coming back here functionality, folks!).
The registration process will require details about:
- the business owners’ social security numbers
- why you are applying for the EIN and
- your estimated annual earnings.
At the end of the process, you will receive an email fairly instantly with a printable document containing your tax number. You can now use this for any filing or for opening a bank account 🥳.