EIN And Tax Requirements For Small Businesses

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Running a business means that there will be more complex taxes than if you work for one. This involves taxes that businesses pay on behalf of their employees, as well as various taxes related to running a business. Different goods and services can require other types of taxes, and different states have different requirements.

Key Takeaways:

• An Employment Identification Number is required for most businesses, but it also helps preserve privacy and prepare for future expansion.

• There are several different types of taxes that small businesses must pay. They include income taxes, self-employment taxes, property taxes, excise taxes, employment taxes, as well as sales and use taxes.

• Recordkeeping is essential for hiring and paying employees. Employers are responsible for payroll-related taxes, verifying that an employee can work in the United States, and reporting hires to their state agency.

What Is an Employment Identification Number (EIN)?

An Employment Identification Number (EIN) is a necessary first step in starting a business. It’s sometimes also referred to as a federal tax identification number or employer tax ID. An EIN is usually only used if you have employees; otherwise, the business owner’s social security number is used as an identifier.

An EIN isn’t required for every small business. Here are some things to consider:

• Do you plan to hire employees?

• Is it a corporation or partnership?

• Will you be withholding taxes on income paid to a nonresident alien?

• Is the business part of a:

  • Trust

  • Estate

  • Farmers cooperative

  • Real estate mortgage investment organization

  • Plan administration

  • Keogh plan

  • Nonprofit

• Will you be filing taxes on excise, tobacco, alcohol, or firearms?

If the answer to any of these questions is yes, then the IRS requires that you apply for an EIN. An EIN is primarily used for tax purposes, and it allows the IRS to keep track of who you pay and how much. That’s why they’re also required for 1099.

EIN has other benefits as well. They can also be required for you to obtain certain business-related services. Such services include:

• Opening a business bank account

• Acquiring a business credit card

• Applying for business permits

• Getting a business loan

• Acquiring a business license

• Giving Form 1099 to independent contractors

Lastly, a large benefit of having an EIN is privacy. Even if your small business is an LLC and doesn’t employ anyone or meet any of the other requirements to have an EIN, it’s still a good idea to get one. It makes it so that you don’t have to use your SSN as a business identifier and limits the likelihood of identity theft.

An EIN won’t completely protect you, of course. But even if someone does manage to get ahold of your business information, it’ll be harder for them to access your personal information than if it’s your SSN.

Types of Taxes for Small Businesses

As a business owner, you’ll have to deal with more than just your own personal income taxes. There are several different types of taxes that you’ll have to keep in mind. Some of it will depend on the type of business you run and just how small your small business is, but here’s an overview of the typical taxes.

• Income tax. As with when you’re working for someone else, you have to pay income taxes. However, unlike when you work for a company, there aren’t taxes withheld on your income. That means you should keep them in mind over the course of the year and set aside money for the purpose.

  Business taxes vary state by state and also depend on the type of business you run. Partnerships, for instance, instead file an annual information return rather than paying income taxes.

• Self-employment tax. In order to be covered under the social security system, you have to pay social security and Medicare taxes. Normally your employer pays them, but if you’re your own employer, then you’re the one who has to pay them. Details vary depending on your circumstances, so be sure to do your research.

• Property tax. Every state’s rules on what should be counted as taxed property differ, meaning you’ll need to check the local rules. Some are focused on business with commercial real estate locations. In other states, vehicles, business assets, and electronic equipment can all be included as taxable property.

• Employment taxes. Having employees complicates business ownership and requires a lot more paperwork. In addition, you’ll be expected to cover certain taxes related to employment. These include:

  • Social security and Medicare. If you employ others, you go beyond having to pay social security and medicare taxes for yourself; you’ll also need to pay it for your employees. This allows the whole system to stay funded.

  • Federal income tax withholding. You’ll be responsible for your employee’s withholding. Federal taxes will be the same nationwide, but different states have different rules for their own tax collection.

  • Federal unemployment (FUTA) tax. The purpose of this tax is to fund unemployment benefits. This allows employees to collect those benefits between jobs.

• Excise tax. This tax is only applicable if your business is involved in manufacturing or selling certain products. It applies to certain types of equipment, facilities, and products. Included in this can be:

  • Environmental taxes. Depending on the impact of your business, you may need to pay environmental taxes to offset it. These vary widely by state.

  • Communications and air transportation taxes. Air travel is highly regulated for safety reasons. Maintaining that system is expensive, so those that make it their business need to pay taxes on it.

  • Fuel taxes. For transportation companies or other businesses that use a lot of fuel – or a specialized fuel – there can be additional taxes.

  • Taxes on the first sale of heavy trucks, trailers, and tractors. Certain large vehicles have additional excise tax connected to them. Generally, the requirements are tied to the vehicle’s weight.

  • Wagering or betting. If you run a betting service or lottery, there can be additional excise taxes involved.

• Sales and use tax. Many states tax goods and services. What is taxed and how much it’s taxed will vary from state to state. Many exclude food, medicine, clothing, newspapers, and utilities – some will also exclude books.

  In addition, sometimes you’ll end up having to pay additional or supplemental taxes if you buy something from out of state – especially if that state doesn’t have a sales tax.

• Estimated tax. You’re required to pay federal income tax on income that isn’t subject to withholding. This will be an estimated tax. An estimated tax will also apply if what’s being withheld isn’t enough to cover the taxes that you owe.

While there are several different types of taxes that you’re required to pay as a business owner, there are also various ways to get tax relief. Many of them are the same ways that individual taxpayers can get some tax breaks, but the rules are slightly different for businesses.

These include:

• Tax relief in disaster situations. Disasters can have huge financial implications for small businesses. The IRS offers tax help in these situations. If your business is in an area that is a federally declared designer area, you can get a faster refund if you file an amended tax return.

• Energy tax incentives. Energy conservation efforts can be rewarded with a tax break. Depending on what state you live in, you may be able to get additional benefits as well. You can get tax breaks for purchasing any of these for your home or business.

  • Solar panels.

  • Solar water heaters.

  • Small wind turbines.

  • Geothermal heat pumps.

  • Fuel-cell equipment.

  • Biodiesel and renewable diesel.

• Tax deductions for charitable donations. Tax deductions are also available for charitable donations. How much of a deduction will depend on what you donate and to what cause. Services aren’t tax deductible; however, expenses related to them may be. Goods that you can donate include:

  • Food.

  • Non-food inventory.

  • Intellectual property.

Hiring Workers and Payroll

Having employees makes the tax situation of a small business much more complicated. There are many more responsibilities involved when you have people who work for you. There are legal requirements that you have to follow.

These include.

• Employment taxes. As listed above, you’ll need to make sure you pay social security, Medicare, and FUTA for your employees.

• Withholding. Not only do you have to pay the withholding, but you’re responsible for supplying your employees with a W-4 withholding exemption form to allow for this. Ideally, employees should be given a new W-4 annually, but it’s rare for businesses or employees to bother with this.

• Recordkeeping. It’s a requirement that you keep proper records. This includes who your new hires are and how long they’ve worked for you. However, the IRS requires that you keep records of all employment taxes for at least four years.

• Verifying an employee’s legal status. Any employees you hire need to be eligible to work in the United States. That means that within three days of being hired, new employees need to fill out a form I-9, employment eligibility verification. This will confirm their right to work in the country.

  These records must also be kept for at least three years after their hiring or a year after the employee leaves, whichever is later.

• Report new hires. You will report this to your individual state’s reporting agency. This applies to both new hires and rehires. California requires it to be within 20 days, and other states are likely to have a similar deadline.

Employment Identification Number (EIN) and Tax Requirements for Small Businesses FAQ

1. Do you need an EIN to start a business?

   No, you don’t need an EIN to start a business. When you first file for your business, you won’t need an EIN. As a matter of fact, you’ll need to file for the business before you get the EIN, as the application requests what type of organization is requesting the EIN.

   That being said, for many businesses, an EIN is required in order to run it. Even if you don’t need an EIN for your business, it’s generally a good idea to get one. For one thing, if your business expands, you’ll likely need one, and for another, it helps protect your privacy.

2. What do you need to apply for an EIN?

   To apply for an EIN, you will need the following:

   • The legal name of your business

   • The legal name of the person applying

   • Full address of the company

   • Name and social security number (or EIN) of the responsible party

   • A trade name, if that applies

   Sometimes you’ll need additional information. This can include:

   • The type of business entity that is making the request

   • The number of members (if it’s an LLC)

   • The state or country in which the incorporation took place (if you’re applying as a corporation).

   • The date that the business was started. Or purchased, if that’s the case.

   • The highest number of employees that are expected to be employed in the next twelve months, as well as the date their first wages were paid.

   • What are the business’s primary activities?

3. How should small business owners plan for income taxes?

   As income taxes aren’t withheld for business owners, they should plan for their taxes year-round. A good tactic is to treat it as if part of your income is withheld every month and to set that aside for tax purposes.

   Depending on where you are and the type of business you run, your tax amount can vary, meaning that you find out how much you may owe when setting money aside.

Author

Di Doherty

Di has been a writer for more than half her life. Most of her writing so far has been fiction, and she’s gotten short stories published in online magazines Kzine and Silver Blade, as well as a flash fiction piece in the Bookends review. Di graduated from Mary Baldwin College (now University) with a degree in Psychology and Sociology.