According to the Wall Street Journal, the number of Americans applying for business licenses reached an all-time high in 2020. Starting a company can be both a thrilling and rewarding experience — but from writing a business plan to choosing the structure that best fits your long-term goals, there’s a lot you’ll need to think about before the doors open. As you venture into the exciting territory of business ownership, there’s an acronym you’ll likely need to familiarize yourself with: FEIN.
That’s short for Federal Employer Identification Number, and most (but not all) businesses have one on file with the Internal Revenue Service (IRS) for tax purposes.
Let’s find out how an FEIN factors into business ownership, its purpose, and how to apply for one.
What is an FEIN?
There’s probably a good chance that the only time you’ve heard of an FEIN, or Federal Employer Identification Number, was through your employer. If you’re about to take the plunge into business ownership, the odds are good that you’ll have to apply for an FEIN.
The reason why is that an FEIN helps to identify a business entity and is used by Uncle Sam to better administer tax laws — and we know he’s always looking for his due when tax time rolls around. While an FEIN can be acquired from the IRS and is typically advised for all businesses, sole proprietors without employees are able to use their personal Social Security number in place of an FEIN.
Although you’ll often hear the terms FEIN and EIN used interchangeably, an FEIN refers exclusively to a Federal Employer Identification Number, while an EIN or Employer Identification Number can refer to either a federal or state identification number. Most states will require both an FEIN and an EIN and it’s likely a requirement where you do business.
What is an FEIN used for?
Just like your Social Security number is a unique identifier that belongs only to you — the 9-digit FEIN is unique to your business and cannot be issued to another company. Once assigned, your FEIN is permanent and will need to be used by your business when filing any of the following forms:
- Form W-2 – Wage & Tax Statement
- Form W-3 – Transmittal of Wage & Tax Statements
- Form 1096 – Annual Summary and Transmittal of U.S. Information Returns
- Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return
- Form 941 – Employer’s Quarterly Federal Tax Return
- Schedule C – Profit or Loss from Business
- Form 1065 – U.S. Return of Partnership Income
- Form 1120 – U.S. Corporation Income Tax Return
Who needs an FEIN?
Though any business, even sole proprietors, can apply for and receive an FEIN, there are some instances when an FEIN is a requirement. If any of the following apply to you, you are required to obtain an FEIN from the IRS.
- You have employees or plan to hire employees
- Your business is a corporation or partnership
- You are required to file a tax return for employment, excise, alcohol, tobacco, and firearms
- You are considering applying for a business loan
- You withhold taxes on income (other than wages) paid to a non-resident alien
- You have a Keogh plan
In addition, IRS lists other scenarios to help you understand if an FEIN is required.
And even though sole proprietors are not required to obtain one, it can work to your advantage since having an FEIN allows you to keep personal and business finances, such as taxes, separate. Obtaining an FEIN is also useful if you plan on growing your business beyond a sole proprietorship. But for very small businesses or independent contractors without employees and who do not plan on hiring any, using a Social Security Number as identification works just fine.
How to obtain an FEIN
The easiest — and quickest — way to get an FEIN is to apply online at the IRS website. Before beginning the application, take a look at the EIN assistant, which will help you determine whether you need an EIN or a new EIN. And for independent contractors or small businesses without employees, using a Social Security number as identification works just fine.
You can learn more about eligibility on the IRS website or read more at the screenshot below:
If eligible, click on the Begin Application button to get the process underway. Set aside about 15 – 20 minutes to complete it because once you start, the clock is ticking: there isn’t a way to save any of the information entered to return at a later time. And keep in mind, that after 15 minutes of web browser inactivity, the session expires.
Once the process is complete and the application approved, you will receive a CP-575 form letter digitally from the IRS — a document that serves as a business verification. In addition to providing you with your newly obtained FEIN, this letter also contains helpful information like your official business name and address, along with a list of tax forms that you’ll be required to file.
If you don’t want to apply online, you can also apply for an FEIN by fax or by mail, with the turnaround time for a faxed application being around four days, while the processing time for a mail application is around four weeks. For either fax or mail, you’ll first need to fill out IRS Form SS-4 – Application for Employer Identification Number. There is also a telephone application option available only for international applicants. If applying by fax or mail, you will receive your CP-575 verification letter by mail, usually within four to six weeks after applying.
Keep your FEIN safe and sound
“Protect your FEIN as you would your SSN. Many people do not know that in the wrong hands, your FEIN can make your business susceptible to identity theft. Thieves can use this information to open everything from credit cards to bank accounts.”
— Sandra Akins, OnPay Senior Product Consultant and Certified Payroll Professional (CPP)
Do I need an FEIN to set up payroll?
Before you can begin to set up payroll for your employees, you will need to have an FEIN issued by the IRS. You’ll also likely need an EIN from your state as well. Both numbers are necessary to run payroll since you will be withholding taxes from employee paychecks that will need to be paid to the appropriate tax agencies. You’ll also need both the FEIN/EIN to file federal and state unemployment tax, as well as W-2 and 1099 information.
If you need to close your business what should you do about your FEIN?
Once you have an FEIN, you have it for life. That doesn’t mean that you can’t close your business. But even when your business closes, the FEIN stays on file with the IRS, remaining in its database.
If you do find that you need to close your business, you will need to notify the IRS of the closure, providing them with the legal name of your business, your FEIN, the street address, and the reason why you need to close your account. It can be helpful to include a copy of your CP-575 notification letter with your request. Keep in mind that the IRS will not close an account until all necessary tax returns for the business have been filed.
OnPay is a user-friendly, easy-to-manage payroll software that lets me focus on running my private practice. When it comes to payroll tax calculations, payroll tax deposits, or end-of-year W2s and W3s for employees, they make it straightforward and stress-free.
— Michelle Underhill, Northern Colorado Therapy Services
A FEIN start!
Obtaining an FEIN is an important part of doing business, and the process is fairly straightforward. And because it can be useful for additional business purposes, applying for one is time well spent — and might be one of the easiest decisions to make as a business owner.
Now that you’ve had the chance to find out more about what an FEIN is and the reasons why you may need one, explore more resources on running payroll or payroll deductions for small businesses. Best of luck as you grow your company!