EIN vs. Tax ID: What’s the difference and which one do you need?

Understanding tax identification numbers (TIN)

To start, a TIN is a unique identifier issued by the government to individuals and entities for tax administration. It’s a crucial tool within the taxation system, enabling effective identification, ensuring compliance, and facilitating accurate tax collection. The individual taxpayer identification number has one job above all others: to help monitor tax obligations.

There are several types of TINs, including the preparer tax identification number, adoption taxpayer identification number, and EIN. The one that likely rings the most bells is the Social Security number, which is issued by the Social Security Administration and commonly used for tax filing. You may have used this number when starting your business, especially if you started as a sole proprietorship.

When running any sort of business, TINs come into play for several reasons: tax filing, payroll management, regulations, and compliance. The number you must use on tax forms can depend on your business structure. Usually, a Social Security number is used in place of an EIN with sole proprietorships, but the use case depends on several factors, including state regulations.

Now that we’ve touched on what a TIN is used for, let’s explain what an EIN’s purpose is.

Understanding employer identification numbers (EIN)

An employer identification number (EIN) is a unique nine-digit number the Internal Revenue Service (IRS) assigns to business entities operating in the United States. The number is used to identify a business for tax filing, payroll management, banking, and other financial transactions.

While not all businesses require an EIN, it is usually necessary for corporations, partnerships, limited liability companies, and nonprofits. The number is also a requirement when a business employs one or more people or files employment or excise taxes. Additionally, most banks require an EIN to open a business account.

The EIN is also beneficial for you as an individual. Having a separate number from your SSN means you can keep your business finances separate from your personal finances. This can reduce the risk of identity theft because you won’t use your SSN with clients, vendors, and other agencies.

So, we broke down the difference between a tax ID and an EIN, but you may still be wondering if this means that a tax ID number and an EIN are the same.

For a final verdict, we spoke with Peggy James, a certified public accountant with over a decade of experience helping small businesses, who spells out the main distinction between the two that businesspeople should keep in mind.

Differences between an EIN and TIN

We’ve already covered that an EIN is a form of tax identification similar to an SSN. However, the specific use cases for individual TINs and business entity EINs vary, as does the application process.

Specificity of use

An EIN is required explicitly for businesses that have employees, operate a corporation or partnership, or file specific tax returns, such as payroll and excise tax. Each EIN is distinct to a single business. For most companies, obtaining a number for employer identification is an essential step in business creation and identity within the tax system.

The TIN is a more general term encompassing several types of tax identification, including SSNs and EINs. It serves the broader purpose of identifying individuals and businesses for tax processing and compliance.

Application process

The application process for different types of tax IDs can vary. For example, to apply for an EIN, a business owner can use the IRS website to access form SS-4. You can submit the necessary documentation online or by mail. If you submit it online, you might receive the tax identification number on the same day.

Applications for TINs depend on the specific type of number; in some cases, an application is unnecessary. For example, the US automatically provides SSNs to US citizens or residents at birth. Most other types of TINs require a formal application, like a W-7. Therefore, while the EIN application is more straightforward, acquiring a TIN depends on the type and individual taxpayer requirements.

Entities that require each

So, when do you need a tax ID number vs. an EIN, and when might you need both? TINs are broadly applicable because there are so many varieties. Still, the most common TINs (SSNs) are individual, connected to people. In contrast, EINs are primarily business identification numbers.

Various business entities use either number. For example, sole proprietorships might use the owner’s SSN, while those with at least one employee can use an EIN. However, for managing your payroll, you will use EINs and tax IDs. The use case depends on the business entity type.

When is an EIN necessary?

Now that you understand the key differences and use cases of each number, it’s time to define when it’s necessary to use an individual or business tax ID number vs. an EIN. Let’s first focus on the specific scenarios when you need an EIN:

• Hiring employees: If a business plans to hire employees, an EIN is mandatory. This number allows the IRS to track employment taxes and report payroll information. It is essential for fulfilling obligations related to wage withholding, unemployment taxes, and payroll reporting. Any business with even one employee must obtain an EIN to comply with federal employment laws.
• Tax reporting and compliance: Businesses that need to file certain tax returns, including employment taxes or business tax returns, must use an EIN. This applies to all types of businesses engaged in activities that require taxation. The EIN helps ensure the IRS can accurately match tax filings with the correct business entities.
• Opening bank accounts and establishing credit: Financial institutions typically require an EIN when a business owner seeks to open a business bank account. This requirement distinguishes the business entity from personal finances and bolsters the legitimacy required for credit applications. Having an EIN helps establish business credit, which is crucial for securing loans and other forms of financing.
• Applying for business licenses and permits: Many states and local governments require an EIN when applying for various business licenses and permits. This regulation ensures local governments can properly track business operations within their jurisdictions and confirm compliance with tax obligations.

When is a TIN necessary?

When considering a taxpayer ID vs. an EIN, it’s important to remember that an EIN is a TIN. That means that a TIN is technically necessary in the above situations as well. When a TIN is representative of an individual rather than an employer,  it may be needed for filing tax returns, claiming tax benefits, or receiving deductions.

Is my SSN my tax ID number?

Yes, your Social Security number is your own personal tax ID number if you’re a US citizen or permanent resident.