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- The U.S. Internal Revenue Service (“IRS”) allocates the nine-digit Federal Employer Identification Number (“FEIN” or “EIN”) for the purpose of tax filing by business (i.e. sole proprietorships, limited liability companies (“LLC”), C-corporations, S-corporations, and non-profit organizations).
- For startup companies, establishing FEIN status with the IRS is an important step in denoting a company as a full-fledged employer operation. This is especially important if you plan to add employees to your new company. Applying to the IRS for a FEIN is one of the first steps your should take when launching your startup.
- Under IRS rules, FEIN registration is required for business entities that hire employees. As the founder of a startup that plans to hire, it’s important to apply for your FEIN as soon as possible.
- Business tax reporting requirements state that a company must use its FEIN for quarterly and annual filing of employee payroll taxes, which include contributions to Social Security and Medicare, to the IRS.
- The FEIN establishes a startup as an IRS tax filing entity for business bank account and business loan application eligibility. Apply for your FEIN as soon as possible to avoid costly delays.
- Founders can protect themselves from employee-related tax obligations under their personal SSN by having a FEIN. This serves as a safeguard for your personal finances.
- The IRS code has strict guidelines for reporting and filing employee payroll taxes for full- and part-time employees; independent contractors are responsible for their own payroll-related taxes.
- FEIN status enables a startup to enroll in the IRS electronic tax payment system for submission of tax payments online or by phone. This makes it much easier for you to manage your business taxes.
- Issues arising from identity theft and other liabilities associated with business transactions performed under FEIN registration are separate from a founder’s legal identity.
What is FEIN or EIN?
The IRS requires any business — including startups — that hire employees to apply for FEIN registration. Like a Taxpayer Identification Number (“TIN”), the FEIN allows the IRS to track business income; including Form 1040 reporting of income transfer to LLC business partners, wages, and tax payments made during a tax cycle.
The FEIN allows a startup to establish a designated business bank account to meet payroll obligations or take out business loans in line with IRS rules. According to IRS rules, businesses must report income on a quarterly or annual basis, or both. Depending on the classification of a business, taxes may be paid quarterly based on historical income. However, as a startup,, you may not have any financial history. In that case, it’s a good decision to consult with a CPA or tax attorney so you can get off on the right foot with the IRS.
A FEIN enables a business to remit payroll taxes, Social Security and Medicare contributions,, and income tax filing to the IRS. Supplied to the IRS on tax forms at the end of each tax cycle, as well as payments and employee W-2 filings, the FEIN tracks income reported, as well as any taxes owed. If your startup is outsourcing work to third-party services rather than IRS registered “employers,” (such as sole-proprietorships or single-member LLCs), you may opt to file Form 1040 individual filings under their personal Social Security Number (“SSN”) tax ID rather than with a FEIN.
A new business enterprise that has generated income within a tax period may be liable for state tax filing as well. Although not all states require individual tax filings, many require state tax ID number registration of companies in addition to FEIN registration with the IRS, depending on the state where your new business is headquartered. Again, this is a scenario where you should consult with your accountant or attorney to learn the rules in your state.
Who needs an EIN?
Startup companies and entrepreneurial operations seeking to hire employees are responsible for filing payroll tax and other related filings under a FEIN. As a founder, understanding how a FEIN works is essential for meeting IRS tax obligations and employee benefit reporting.
A unique tax ID number, the nine-digit FEIN, identifies a business entity to the IRS and is the required government number for hiring employees under U.S. federal law. If a CPA or other tax preparer is addressing new business startup concerns in the area of taxation, chances are a nine-digit FEIN already exists; if not, your CPA can help you apply for one.
Startups and established businesses that meet the following criteria are required by the IRS to apply for a FEIN:
- Plans to hire employees, including those entities filing Form 1040 individual tax reporting as sole proprietorships
- C-corporations and S-corporations
- Multi-member LLCs
- New business purchase or continuity of an inherited business
- The entity is attached to a Keogh plan or individual 401 (k) retirement plan
- Bankruptcy filings are attached to business income or debt
While the FEIN is normally associated with incorporated businesses, it also applies to registered sole proprietorships, partnerships, non-profit organizations, associations, estates of the deceased, trusts, and a range of other IRS tax filing obligated entities.
Who is exempt from getting a FEIN?
Startups not reliant on employee labor may be exempt from FEIN registration with the IRS. If you intend to be a sole proprietorship or single-member LLC not planning to hire employees, you may elect "disregarded entity" status under IRC rules, eliminating the need for tax treatment as an employer organization with the IRS.
The IRS requirement of business registration for a FEIN is intended solely for the purpose of tax reporting, and not for participation in any other activities such as lotteries or tax lien auctions. Startup operations structured as sole proprietorships and other businesses not hiring employees or in the early startup phase without IRS payroll tax reporting obligations are exempt. IRC 501(a) entities are subject to automatic revocation of tax-exempt status where there is a failure to report annual information returns for three (3) consecutive years. The IRS assumes the full formation of an organization in such cases, requiring a registered employer tax ID number by default.
According to the IRC rule definition, the reporting of employee payroll taxes is separate from the reporting of payments made to independent contractors. This is extremely important for startup operations. Reported payroll and payments issued to subcontractors not requiring a registered FEIN for tax reporting is permitted by the IRS. The FEIN does not replace the 1040 individual tax reporting obligation of sole proprietorships, partnerships, and single-owner LLCs filing under an SSN. This is one area where the IRS and state agencies are really cracking down, so tread carefully and seek the advice of a trusted tax professional.
How do you apply for FEIN?
An established FEIN enables a startup to enroll in the federal IRS electronic tax payment system for submission of owed tax payments online, or by phone. This is commonly done by C-corp and S-corp employer organizations on quarterly tax filing and payment schedules, and by other entities at the end of each annual tax cycle, or on a monthly installment basis as part of an individual Form 1040 tax filer payment agreement.
To apply for a FEIN online at www.irs.gov, you will need an IRS taxpayer identification number, usually, your Social Security number, Passport or visa numbers or other information may be demanded by the IRS in cases where the founder-applicant is not a U.S. citizen or resident with an existing individual taxpayer ID. The IRS also requires details about the structure of the startup, including partners, co-owners, and principals. If you are a foreign applicant seeking additional information, a licensed tax preparer, CPA, or attorney specializing in taxation can guide you through the FEIN registration and tax filing process in the United States.
- Hiring Employees — IRC rules provide that all IRS filing entities with employees must comply with FEIN registration to meet federal employee income tax rules and other related filing obligations such as Social Security and Medicare contributions in compliance with federal law. You will need to have your FEIN in place before you begin the hiring process.
- Business Tax Filing — Distinct from the Form 1040-related SSN tax ID filing, the FEIN affords separation of an entity from the individual tax reporting of owners on record. Corporations and other businesses must apply for a FEIN to file quarterly and annual tax reporting. As a founder, this is a measure to keep your personal finances/taxes separate from those of your startup.
- Business Credit – FEIN registration indicates that a company is established as a separate entity and that all credit-bearing agreements undertaken by your startup are recognized as transpiring between legitimate IRS tax filing entities.
- Vendor Credibility – The FEIN affirms IRS federally registered tax status with vendors doing business with your startup.
- Business Transactions – Businesses with an established FEIN are eligible for business bank accounts. FEIN-holding business loan applicants who are required to report to the IRS are generally subject to separate credit profile risk assessment than individuals operating under institutional borrowing rules. This means that you might be eligible for more favorable interest rates.
- Identity Theft Prevention – FEIN registration of an entity separates the tax liability of an employer from its owners, serving to protect the personal identities of those parties.
- Registration limitations – An existing FEIN is typically ineligible for transfer to a new entity. Restructuring a business or ownership generally requires an IRS application for a new tax number. For example, the designation of a business as a C-corp under an existing FEIN registration already assigned to an LLC is not usually done without applying for a new tax ID. The impact on this for startups is that if you decide to restructure your business as it grows, you would have to apply for a new FEIN.
- Issuance Restrictions – Effective May 12, 2012, the IRS limitation for FEIN issuance was restricted to one per applicant per day. This means that tax ID numbers assigned to the same applicant are restricted to a single issuance per each IRS public administration workday. The limitation applies to all applicant requests via fax, mail, and online.
- Exempt 1040 Tax Filing – LLCs and sole proprietorship owners filing Form 1040 individual tax filings for transfer of business income under a personal SSN with no employees are not responsible for FEIN tax reporting.
- Lost or misplaced number – Relocation of a FEIN is easy if the business tax ID is available within the archived record of a company’s IRS tax filings. If not available, contact the IRS for assistance or the financial institution where your startup’s bank account is held.
Tax treatment for different types of businesses
Startups filing taxes as partnerships or single-member LLCs as “pass-through” operations are default tax structures that avoid the “double” taxation of a C-corp or S-corp with owner assumption of income after retained earnings by way of individual Form 1040 filing. In this manner, all business income is taxed a single time, based on each founder’s individual income tax rate. An entrepreneurial enterprise or startup as a pass-through entity with two or more members may still be required to apply for a FEIN to meet IRS tax reporting of part-time, full-time, or temporary employee payroll, benefits, and income tax filing activity.
Tax Treatment of Corporations
The FEIN allows the IRS to track the income-related business activities of registered corporations. For this reason, all C-corporations, S-corporations and LLCs with Form 8832s filed with the IRS require a registered FEIN.
For the purpose of taxation, corporations are treated as separate entities. The IRC stipulates that all corporate entities are responsible for quarterly and annual tax filing. This includes FEIN-related employee income, Social Security and Medicare contributions, and payroll record reporting.
Tax Treatment of LLCs
Employee-hiring limited liability corporations are required by the IRS to register for a FEIN. Regardless of whether an employer is an LLC, if employee hiring is elected, the entity must be treated as either an S- or C-corporation and obtain a FEIN under federal law.
Startups and other pass-through LLCs reporting retained earnings for the year, generally file a Form 8823 which is considered an “internal” reporting of income for IRS record. Retained earnings reporting is not transferred as part of the Form 1040 individual income tax reporting responsibility of the owner(s) of the business entity.
Tax Treatment of Partnerships
All general partnerships and limited liability partnerships hiring employees require an IRS-registered FEIN for quarterly reporting. There is no exemption for owners filing 1040 individual income tax filings to meet IRC “pass through” rule requirements for the reporting of transfers.
Tax Treatment of Sole Proprietorships
Startups without employees do not require a FEIN and are obligated to file 1040 individual income tax filings for the transfer of income under their SSN. Like single-owner LLCs, sole proprietorships, including freelancers contracting outsourced subcontractor services, are not required to use an IRS-registered FEIN to file taxes in lieu of an SSN.
Learn more with us
- What is an EIN?
- Startup taxes
- What is an S-Corp vs. C-Corp?
- Why do startups choose to incorporate as C-corporation over LLC?
- How to change from sole proprietorship to LLC
- Learn more about accounting for startups
Access more guides in our Knowledge Base for Startups.
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