What Is an Employer Identification Number (EIN)?

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DEFINITION

An Employee Identification Number, or EIN, is a number given by the IRS to distinguish businesses from one another.

Definition and Examples of an Employer Identification Number

Each U.S. citizen is issued a unique Social Security number upon their birth. This number enables easy identification by government entities and also serves to distinguish one person from another. In the same manner, the IRS assigns Employee Identification Numbers (EINs) to businesses, usually when they are newly established. EINs serve much the same function for businesses as Social Security numbers do for individuals—namely, to provide a means of easy identification and distinction from other businesses for tax and other purposes.

  • Alternate name: Federal Tax Identification Number or Tax Identification Number
  • Acronym: EIN or TIN

For example, say Subhash decided to open a specialty grocery store as a limited liability company (LLC). Upon registering his business with his state, Subhash also was required to apply for an EIN with the IRS. To do so, Subhash logged on to the IRS website and entered his personal and business information. Subhash then quickly received an EIN after the IRS validated his information. This gave the IRS a record of Subhash’s business and a means of identifying the store for tax purposes.

How Employer Identification Numbers Work

The EIN is a nine-digit number and takes the following format: XX-XXXXXXX. Every EIN takes the same form, regardless of the business size or type. LLCs, partnerships, nonprofits, and corporations, among others, are assigned an EIN with this format.

You are limited to applying for one EIN per “responsible party” per day by the IRS. The responsible party is the person who ultimately owns or controls the business or who exercises ultimate effective control over the entity. Unless the applicant is a government entity, the responsible party must be an individual, not an entity.

Owners of sole proprietorships are not required to file for an EIN, and can choose to use their Social Security number for the business.

The most efficient way to obtain an EIN is to log on to the IRS website and apply for one electronically. There is zero cost associated with applying for an EIN. An EIN can also be obtained via mail, phone, or fax. The EIN enables the U.S. government to identify taxpayers who are required to file various business tax returns.

Generally speaking, business entities cannot open bank accounts without an EIN. The purpose of the unique identifier is for employers to file taxes and pay employees. Therefore, it is crucial that a new business owner apply for an EIN in a timely fashion.

Let’s say Subhash needs a business account to pay his vendors and to deposit earnings from his store. Subhash will not be able to open a business account if he neglected to apply for an EIN when he first started his business. Subhash also needs his EIN to file his tax returns at year end. Should his store become busy and require Subhash to hire other employees, he will also require an EIN to pay his staff.

Do EINs Change?

It is sometimes necessary to apply for a new EIN. Companies that change ownership structure must apply for new EINs, as do companies that merge with other businesses. Say Subhash requires an influx of cash and decides to partner with an investor. Once Subhash changes the structure of his company from an LLC to a partnership, he is required to apply for a new EIN that reflects the new entity.

Businesses must also apply for a new EIN when they file for Chapter 7 or Chapter 11 bankruptcy, establish retirement plans, or incorporate, for example.

Do EINs Expire?

EINs are forever. They do not expire, and the IRS will not cancel an EIN, even upon the dissolution of a business. The IRS will also never issue a previously used EIN to another organization. All EINs remain on file, in case the IRS needs to refer back to them at a later date.

Key Takeaways

  • EINs are unique, nine-digit tax identification numbers the IRS issues to all U.S. businesses.
  • EINs are required to file taxes, open bank accounts, pay employees, and more.
  • EINs never expire, even upon the dissolution of a business.
  • It is necessary to apply for a new EIN upon a change of ownership structure, merger, establishment of a retirement plan, or bankruptcy, among other business situations.

Article Sources

  1. Internal Revenue Service. "Employer Identification Number: Understanding Your EIN," Page 2. Accessed Feb. 9, 2022.

  2. Internal Revenue Service. "Employer Identification Number: Understanding Your EIN," Page 3. Accessed Feb. 9, 2022.