What is the Purpose of Obtaining a Federal Tax Identification Number, Who Needs One, and Why Do They Need It?
A Federal Tax Identification Number (FTIN), otherwise known as an Employer Identification Number (EIN), is a 9-digit number used by the Internal Revenue Service (IRS) to identify a business. Applying for this FTIN or EIN number is a free service offered by the IRS, and is a relatively easy and quick process to obtain.
Both a FTIN and EIN are the same thing and the names are often used interchangeably. This number is a business’s official federal tax identification number. Each FTIN is unique to a single individual business and is issued directly by the Internal Revenue Service itself.
There are also state tax ID numbers, and although similar, they are different from the federal tax ID numbers. Both state and federal levels of government have different laws and tax systems that are in place to determine the amount of tax that needs to be paid. Most businesses will be required to have both a federal tax ID number as well as a state tax ID number, but there are 7 states that do not charge state income tax – Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Not every business or responsible party is required to have a federal tax identification number. You will need to obtain a FTIN for your business in these situations:
- You are starting a new business where you are not the only employee
- You operate your business as a partnership or corporation
- You have or are beginning to hire and pay employees
- You want to open a business bank account of some sort
- You’re interested in applying for a business loan
- You want to apply for business permits or licenses
- Your business withholds taxes on income that is paid to a non-resident alien (other than wages)
- You file employment, excise, or alcohol, tobacco, and firearms tax returns
- You have a Keogh plan, which is a type of retirement or pension savings plan. A Keogh plan is available to self-employed people or owners of a sole proprietors or unincorporated business. This tool is used to prepare for retirement by offering a contribution plan that is paid with pre-tax dollars
- You need to file your business taxes, as well as pay them
- And other miscellaneous reasons that make having a federal tax ID number necessary
In addition, a Federal Tax ID Number is also necessary in these situations:
- You were named as the representative of an estate for a deceased person or business operator
- You are a trustee for certain types of trusts, including beneficiaries, revocable/irrevocable trusts, living trusts, testamentary trusts, conservatorship trusts, or guardianship/custodianship trusts
You will need to have your federal tax identification number in hand before beginning the process of any of the above activities.
Most businesses will need to have a FTIN, but not all. FTINs are always required for corporations and partnerships. A single-member Limited Liability Company (LLC), which is also known as a sole proprietorship, doesn’t always need one. For people that own a home-based type of business where you are the only employee, you may only need to have a social security number to file and your taxes.
Federal Tax ID Numbers are formatted in a very specific way – xx-xxxxxxx – with two numbers separated by a dash and another seven numbers. They are formatted differently than a Social Security Number (SSN) to eliminate confusion between the two.
Federal Tax Identification Numbers and Social Security Numbers are used for different purposes. FTINs are issued only to businesses, individuals, entities, and in certain trust or estate management situations, where SSNs are issued to individual people. They are not used interchangeably, as each has its own specific purpose.
To apply for a FTIN/EIN, a form from the Internal Revenue Service needs to be submitted along with the required paperwork and information. There is no charge or fee necessary to apply. You may apply by mail, telephone, or online for this ID number.
To apply for a federal tax identification number, there are a few steps to follow according to the Internal Revenue Service:
- Determine if you need to obtain a federal tax identification number for a business and if you are eligible to receive one
- Understand the process and steps needed to apply
- Gather the information needed to fill out the form completely
- Submit the Form SS-4 with the appropriate information or paperwork to the IRS for processing
To obtain a federal tax identification number or employer identification number, you will need to begin by filling out a Form SS-4 from the Internal Revenue Service. This form also has some important information to read through to understand the process of applying.
Even though applying for a federal tax identification number is only for a business or trust manager or executor, the applicant must have a valid Taxpayer Identification Number – either a Social Security Number, Individual Taxpayer Identification Number, or current Employer Identification Number.
Necessary Applicant Information
The Form SS-4 isn’t a difficult form to fill out and the application process is free. The form itself is only one page but you will need to know the following information on the applicant:
- The legal name of the business entity (or individual) applying for the federal tax identification number
- The trade name of the business if it is different from the legal name
- The name of the person who is the executor, administrator, trustee, or the person who would be considered the one to handle the filing
- The mailing address where the entity or business is located
- The street address if it is different from the mailing address
- The city, state, and zip code where the entity or business is located (for both the mailing address and street address if they are different)
- The name of the county and state where the principal business is located
- The name of the responsible party
- The social security number (SSN), individual taxpayer identification number (ITIN), or employer identification number (EIN) of the person filling out the form
What Information on the Business Structure is Needed?
In addition to the filer information, information on the business structure is also required, including (but not limited to):
- The type of entity – Most entities will fall under the category of sole proprietor, partnership, corporation, personal service corporation, church or church-controlled organization, the social security number of the deceased, the plan administrator, the trust grantor, non-profit organization, or other entity. There are also a few additional types of entities that can be chosen
- The applicant’s role in the business, such as owner, partner, beneficiary, etc.
- The reason for applying for the federal tax identification number
- The date the business started or was acquired, along with the closing month of the accounting year and the highest number of employees expected in the next year
- The type of business and main products sold, work done, products produced, or services provided
Do You Need a Taxpayer Identification Number (TIN)?
If the applicant has a tax identification number (TIN), you will be asked to supply it. TINs are an identification number used to identify a tax payer. A social security number is the most common form of TIN.
The difference between a taxpayer identification number and social security number is that a taxpayer identification number is issued by the IRS, and a social security number is issued by the Social Security Administration. If you do not have a TIN of SSN, you need to have an explanation as to why you do not.
What is the Reason for Applying for a Federal Tax Identification Number?
Obtaining a federal tax identification number is often one of the first steps anyone would need to do to start a brand new business. FTINs are used to identify a legal business entity, while giving you as the business representative a way to keep your personal and business financial information separate.
As part of the application process, the applicant will need to supply the reason that they are applying for a federal tax identification number.
If You Are an Authorized Representative
On certain occasions, the applicant filling out the form is not the authorized representative, or the person filling out the form needs to designate an authorized representative. If that is the case, information on the person being named as the authorized representative is necessary, including:
- An explanation of the assigned representative’s role – What is their responsibility in the business or trust for this application?
- The authorized representative’s full legal name
- The authorized representative’s contact information, including their mailing address with zip code, street address with zip code (if different), phone number, and fax number (if applicable)
- An explanation as to what the relationship of the representative is to the applicant and why the applicant is filing the paperwork
Signature and Certification Section
Of course, and as is typical of any government document, the applicant and authorized representative (if applicable) will need to supply their name and title, personal signature, telephone number, fax number (if applicable), and date of signing. What application would be complete without a proper signature after all?
Providing the information for a federal tax identification number is a very important responsibility, as each signer is responsible for providing true and accurate information to the best of their ability under penalties of perjury. If you aren’t sure on something on the application, take the extra time to find out. Guesses and the IRS do not work well together.
Do You Need Any Supporting Documents?
Once you have completed the application and submitted it, most of the time supporting documents are not necessary to supply.
However, after thoroughly filling out and submitting the document, the IRS may require some supporting documentation to verify information on the application. If that is the case, you will be notified and asked to supply the documents that are needed, and they will give you a timeline to get them in.
Some types of supporting documents that may be necessary include articles of incorporation, partnership agreements, or other business formation documents.
What is the Submission and Processing Method for FTINs?
So how long does it take to receive your federal tax identification number once you’ve applied? It depends upon how you would like to apply. Most people prefer to apply online, although you are able to apply by fax or mail as well if you are a citizen of the United States of America or U.S. Territories. International applicants will need to apply via a special phone number.
If you apply online, you will be able to have your information validated during the session right away through the IRS’s secure online application. Once your application is completed and it is determined that a FTIN is appropriate, a federal tax identification number is issued immediately.
Applying by fax is also available and that process would require you to have a return fax number. The form can be downloaded from the IRS website. You will be required to fax the completed Form SS-4 application after you have completely filled out the form. Once you apply, if a FTIN is appropriate, your new federal tax identification number will be faxed back to you within four days.
If you apply by mail, the application process takes approximately four weeks. To apply, you’d need to download and complete the same Form SS-4 and mail the completed form in to the Internal Revenue Service.