If you own a small business or have a job in the gig economy, it is important to understand how to pay taxes on that income. Paying taxes on business income or a side gig is somewhat different than paying taxes as an individual taxpayer.
As an individual taxpayer, your tax account is directly linked to your Social Security number (SSN). When you start a job, your employer requests that you fill out a Form W-4, Employee's Withholding Certificate. Form W-4 gives your employer the information they need to submit your wages and pay your taxes to the Internal Revenue Service (IRS). It links the information directly to your SSN. When you receive your Form W-2, Wage and Tax Statement from your employer at tax time, your SSN will be on the form.
What Is an EIN?
The IRS uses EINs to legally separate a business entity from its individual owner or owners. An EIN identifies the tax account for the business like an SSN identifies the tax account for an individual taxpayer.
Similar to an SSN, an EIN is a nine-digit series of numbers. However, the format is slightly different. An EIN uses the format XX-XXXXXXX rather than the SSN format of XXX-XX-XXXX. Similar to SSNs, no two EINs are the same.
Who Is Eligible for an EIN?
The IRS requires most businesses—corporations, partnerships, most LLCs, and some sole proprietorships—to use an EIN. Only disregarded entities—those the IRS does not deem legally distinct from the business owner—can file taxes with an SSN rather than an EIN. If you have any employees, the IRS requires that you use an EIN. This is also the case for independent contractors and freelancers working in the gig economy. Sole proprietors and single-member limited liability companies (LLCs) who do not have any employees can file taxes with an SSN. They are not required to have an EIN. However, it may still be beneficial for you to have an EIN, even if it's not required. It allows you to keep your business and personal tax information separate, and it allows you to open a business bank account. Both make it easier for you to track your business income and expenses.
Using Your EIN
Your EIN is not only useful for tax filing. Your EIN can also be used to:
- Open a bank account and obtain credit in your business's name
- Hire and pay your employees
- Obtain business permits and licenses
- Protect your privacy by limiting exposure of your SSN
If you are a freelancer or independent contractor, anyone who pays you over $600 in the year should request that you fill out a Form W-9, Request for Taxpayer Identification Number. If you have an EIN, you can provide the EIN rather than your SSN. This allows you a level of protection against identity theft. The number you provide on a Form W-9 will also appear on the Form 1099-NEC, Nonemployee Compensation you receive at tax time.
How to Get an EIN Number
Establish your business type prior to requesting an EIN. For example, if you plan to operate your new business as an LLC, create the LLC prior to applying for an EIN. You can apply for an EIN directly with the IRS, or you can use an independent service to complete the process for you.
You can apply online, by fax, or by mail with the IRS. If you apply by fax or mail, you will need to complete the Form SS-4, Application for Employer Identification Number. When you apply online, you will be able to view and print your assigned EIN at the end of the online session. Via fax, the process is generally complete within four business days. Via mail, you can expect a wait time of approximately four weeks.