In 2023, there were over 286,000 businesses in the auto mechanic industry. This means a growth of 1.5% from 2022. And if you are also thinking about opening an auto shop (or any other kind of business), you need to know about the Employee Identification Number (EIN).Â
Applying for an EIN is an important step in opening any business, including an auto shop. This EIN will be used throughout your business’ lifespan, from setting up a business bank account to hiring and paying employees. Plus, it is also needed to file your business taxes.Â
So, what is an EIN for business and why does your auto shop need it? Let’s break it down.Â
What is an EIN?
An Employee Identification Number (EIN) is a unique nine-digit identifier in the XX-XXXXXXX format. It is assigned by the Internal Revenue Service (IRS) to a business for tax purposes. EIN serves as a business’s identification number, just like individuals have a Social Security Number (SSN) for identification.Â
Purpose of an EIN
The primary purpose of an EIN is to identify taxpayers who are required to file their business tax returns. Apart from that your business needs an EIN for several purposes. These include:
Tax identification
An EIN is required for filing federal and state taxes. These include income tax and employment tax.
Opening bank accounts
Banks typically require an EIN to open a business bank account to help you separate personal and business finances.
Hiring employees
If your business plans to hire employees, you’ll need an EIN. This is for payroll tax purposes and reporting to the IRS.
Business contracts
Many business contracts and agreements require an EIN for legal and tax purposes.
IRS correspondence
Any communication or interaction with the IRS, such as applying for licenses or permits, requires an EIN.
Establishing business credit
An EIN allows your business to build its credit profile that remains separate from your personal credit.
Legal requirements for obtaining an EIN
To obtain an EIN, businesses must comply with certain legal requirements set by the IRS:
Registering with the IRS
You need to start by registering your business with the IRS. This will get you your EIN. This process involves providing information about the business structure, ownership, and other relevant details.
Types of Businesses
Various types of businesses are required to have an EIN. These include:
Corporations
C-Corporations and S-Corporations require an EIN.
Partnerships
General partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs) need an EIN.
Limited liability companies (LLCs)
Single-member LLCs and multi-member LLCs need an EIN especially if they have employees or elect corporate tax treatment.
Nonprofit organizations
Nonprofits also require an EIN for tax-exempt status and other IRS-related activities (keep scrolling for more details).
Trusts and estates
Entities such as trusts and estates that engage in business activities require an EIN.
Businesses with employees
Any business that hires employees, regardless of its legal structure, needs an EIN for payroll and tax purposes.
Organizations exempt from taxes in the US
However, some organizations are exempt from taxes in the US. These include:
- These are charitable, religious, educational, scientific, and literary organizations. These qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code.
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- Social welfare organizations, civic leagues, and local associations of employees.
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- Business leagues, chambers of commerce, real estate boards, and professional football leagues.
- Federal, state, and local government entities are generally exempt from federal income tax. They do not require an EIN for tax-exempt purposes.
- Churches, synagogues, mosques, temples, and other religious organizations. These may be exempt from tax under specific IRS guidelines.
However, these organizations exempt from tax may still need an EIN. From opening bank accounts to hiring employees or even for applying for grants, and conducting certain business activities.Â
The process and requirements for obtaining an EIN may differ for tax-exempt organizations. Tax-exempt organizations should consult with a tax professional or the IRS. They will get specific guidance regarding their EIN requirements.
Benefits of having an EIN
Having an EIN offers several advantages for businesses:
Protects your personal information
Using an EIN instead of an SSN helps protect business owners’ personal information. It reduces the risk of identity theft by keeping personal and business finances separate.
Establishes credibility
An EIN enhances a business’s credibility with customers, vendors, and financial institutions. It shows that the business is legitimate and operating in compliance with tax laws.
Simplifies tax reporting
EINs streamline tax reporting processes. They make it easier for businesses to file taxes accurately and comply with IRS regulations. This helps them avoid penalties and audits.
Apart from the above, there are other benefits. Having an EIN also allows you to hire employees, open bank accounts, and carry out legal and financial transactions.
How to obtain an EIN for your business
There are three ways to obtain an EIN. You can apply online, fill out form SS-4, or contact the IRS individually. Let’s discuss each of these options.Â
Apply online
The quickest way to get an EIN is by applying online through the IRS website. The online application process is straightforward and can be completed within minutes. When applying online for an EIN, you’ll need to provide the following information:
Legal name of the business
The exact legal name of your business entity as registered with the state.
Trade name (if applicable)
If your business operates under a trade name (DBA – Doing Business As), provide this name as well.
Business entity type
Specify the type of business entity. This could be a Sole Proprietorship, Partnership, Corporation, LLC, Trust, Estate, etc.
Reason for applying
Indicate the reason for applying for an EIN, such as starting a new business, hiring employees, banking purposes, etc.
Business address
Provide the physical address of the business, including the street address, city, state, and ZIP code.
Mailing address (if different)
Provide separate mailing address details. This is only in case your mailing address differs from the business address.
Contact person
Provide the name, title, and contact information (phone number, email) of a responsible party or contact person for the business.
SSN or individual taxpayer identification number (ITIN) of the responsible party
The IRS requires the SSN or ITIN of the person responsible for the business (owner, partner, etc.). They need this to associate with the EIN application.
Business activities
Describe the primary activities or purpose of the business (e.g., retail sales, consulting services, manufacturing, etc.).
Number of employees (if applicable)
Indicate the estimated number of employees the business plans to hire within the next 12 months, if applicable.
Date the business started or acquired
Provide the date when the business officially started or acquired from a previous owner.
Closing month of the accounting year
Specify the month that ends your accounting or fiscal year (e.g., December, June, etc.).
Additional information will be needed depending on the type of business entity. To expedite the application process, have all relevant details ready and accurate.
Fill out form SS-4
Alternatively, businesses can fill out Form SS-4 and submit it to the IRS by mail or fax. This form requires information about the business, such as its legal name, address, and ownership details. Here’s a step-by-step guide on how to fill out Form SS-4:
Download the form
Obtain Form SS-4 from the IRS website or other authorized sources.
Business information
- Enter the legal name of the business entity as it appears on official documents.
- Provide any trade name or “Doing Business As” (DBA) name, if applicable.
- Specify the entity type (e.g., Sole Proprietorship, Partnership, Corporation, LLC, Trust, Estate).
Business address
- Enter the physical address of the business, including street address, city, state, and ZIP code.
- If the mailing address differs from the business address, provide the separate mailing address details.
Responsible party information
- Identify the “responsible party,” who usually controls, manages, or directs the business.
- Provide the responsible party’s name, SSN, Individual Taxpayer Identification Number (ITIN). Also, provide their contact information (phone number, email).
Reason for applying
Indicate the reason for applying for an EIN, such as starting a new business, hiring employees, banking purposes, etc.
Employer identification number (EIN)
If you previously applied for an EIN and are requesting a new one, enter the previous EIN in the appropriate section.
Business activity information
Describe the entity’s primary business activities or purpose (such as retail sales, consulting services, manufacturing, etc.).
Closing month of accounting year
Specify the month that ends your accounting or fiscal year (December, June, etc.).
Signature
- Have the form signed and dated by an authorized person representing the business entity. This could be the owner, partner, corporate officer, or authorized agent.
- Form SS-4 allows for the designation of a third-party designee. A third-party designee is an individual or entity authorized by the business. They can receive the EIN and act on the business’s behalf regarding the EIN application. In such a case, provide the required details.Â
Submission
Once completed, submit the Form SS-4 to the IRS using the designated submission methods (online, mail, fax) per the IRS guidelines.Â
Contact IRS
Businesses can also apply for an EIN by phone to the IRS. The IRS representative will guide them through the application process and issue the EIN upon approval.
Best practices for protecting your EIN
Scammers can use your information to file taxes and get tax refunds. In 2023, the IRS received upwards of 294,000 complaints of reported identity theft. In today’s day and age, where a data breach is common, you must protect your personal information.
To protect your EIN and prevent identity theft, here’s what you can do:Â
Safeguard documents
Keep EIN-related documents in a secure location. You can only share them with trusted parties. Avoid displaying your EIN publicly or on unsecured platforms.
Limit access
Limit access to your EIN to authorized personnel only. Ensure that employees and contractors understand the importance of EIN security. These also need to follow established protocols.
Monitor credit reports
Regularly monitor your business credit reports for any unauthorized inquiries or suspicious activity. Promptly report any discrepancies or signs of identity theft. You will report these to the credit bureaus and relevant authorities.
Educate employees
Educate your employees about the importance of EIN security and data protection practices. Train them to recognize phishing attempts, fraud schemes, and other security threats.
Use strong passwords
Use strong passwords and multi-factor authentication for accounts and systems that access EIN-related information. Regularly update passwords and secure access points.
Secure digital assets
Secure digital assets containing EIN information, including electronic files, databases, and cloud storage. Use encryption and access controls to protect sensitive data, and secure your website.Â
Verify requests
Verify the legitimacy of requests for your EIN before sharing any information. Be cautious of unsolicited communications or requests for sensitive information.
Stay informed
Stay updated on cybersecurity trends and IRS guidelines. Also, keep up with regulatory changes related to EIN security. Implement recommended security measures and adapt to evolving threats.
Difference between EIN and TIN
The main difference between an Employer Identification Number (EIN) and a Taxpayer Identification Number (TIN) lies in their purpose and usage:
EIN (Employer Identification Number)
Purpose
Businesses and entities use an EIN for tax purposes, especially for employment tax reporting and business-related transactions.
Use
Businesses, corporations, partnerships, LLCs, trusts, estates, and other entities use EINs to identify themselves to the IRS and for various tax-related activities, such as filing tax returns, paying taxes, hiring employees, and opening bank accounts.
TIN (Taxpayer Identification Number)
Purpose
A TIN is a broader term that includes various types of taxpayer identification numbers, which individuals and entities use for tax purposes.
Use
Individuals and entities use TINs to report income, pay taxes, and fulfill tax obligations. Types of TINs include:
- SSN: Used by individuals for personal tax purposes, such as filing individual tax returns and reporting income.
- ITIN (Individual Taxpayer Identification Number): Used by individuals who are not eligible for an SSN but have a tax filing requirement, such as non-resident aliens and dependents.
- EIN: Used by businesses and entities for tax purposes, as described above.
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EINs are specific to businesses and entities for tax and business-related purposes. TINs encompass a broader range of taxpayer identification numbers used by individuals and entities for tax compliance.
Closing thoughts
An EIN is vital for businesses to stay secure and follow the rules. Knowing its purpose, benefits, and how to protect it helps owners keep their businesses safe from fraud and theft. Getting an EIN and using security measures is important for long-term success. Especially for small businesses like auto repair shops.
Frequently Asked Questions
Security is important in business to protect sensitive data, maintain customer trust, and prevent financial losses.
EINs are used for tax identification, opening bank accounts, hiring employees, and conducting business with the IRS.
The EIN number is significant for tax reporting, separating personal and business finances, and establishing credibility.
Your business needs an EIN if it has employees, operates as a corporation or partnership, or meets IRS criteria for tax purposes.
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