Are you establishing a business in a state that has a taxation policy? If so, you need to familiarize yourself with the sales tax, of which the Employer Identification Number (EIN) is one of it. Some business owners have confused this to be the same thing as a seller’s permit. On the contrary, they are two different concepts.
In this article, you will find out the meaning of an EIN, why it is not the same as the seller’s permit and every other thing you need to know.
What is an EIN Number?
An Employer Identification Number (EIN) is a unique sales tax number used for tracking and reporting the financial status of a company or business. The report includes the compensation for employees, the federal and state taxes.
As a business owner, it is pertinent to apply for the EIN, which is sometimes called Federal Tax ID. Doing so can help you make accurate documentation of the sales tax responsibilities of your business.
- Tax Laws and How to Apply for Federal Tax ID Number
- Preparing for Tax Season Like a Pro
- What Happened to the R & D Credit Under Tax Reform?
Why an EIN Number is not the Same as a Seller’s Permit
To settle the confusion that arises between the two, I will make a simple explanation of the difference between an EIN and a seller’s permit.
A seller’s permit, which is also called sales and use tax permit, is a type of license used by businesses for tax collection. That is, your business can use this permit to collect sales taxes on specific items, such as services and goods. Of course, these items must be taxable before the permit can be used for taxation.
EIN Number vs. Social Security Number: What is the Difference?
The primary difference between the two is their usage. While the Employer Identification Number (EIN) is used in corporate settings, such as a company, the Social Security Number is used for individuals.
Why the IRS Requires Business to Have the EIN
The IRS requires business owners to apply for the Employer Identification Number (EIN) because it helps in tracking the tax responsibilities. The question is: “does your business need the EIN?”
By default, businesses operating in a state with clear tax laws are expected to apply for, use and appropriately report their financial status. But there may be some exceptions. For example, not-for-profit organizations and charitable organizations may not be required to pay tax, at least, for the first few years.
During this time, these organizations are considered tax-exempt or tax-free and are free to operate without reporting their financial status. However, these organizations may be required to apply for an EIN to start the tax report after three years of being tax-exempt.
How to Apply for the Employer Identification Number (EIN)
You can follow the guidelines below to apply for the EIN and start fulfilling your business’ tax responsibilities:
1. Make Sure You Meet the Conditions
The first step to take is to be sure you meet the conditions for applying for an EIN. The conditions include:
- Your business doesn’t qualify for the tax-exempt status, i.e., the business is not an organization.
- Applying for an EIN after three years of forming the organization.
- Make sure that the business has a legal structure, such as a board of directors, a feasible business structure, and making profits.
2. Confirm Your Eligibility to Apply
Contact the local tax authority to confirm your eligibility to apply for an EIN. Usually, the application is done online. So, you want to get the go-ahead to start the online EIN application process.
3. Provide the Needed Information
Endeavor to provide the information and supporting documents required for applying for an Employer Identification Number (EIN).
The information includes:
- Business Name: Provide the name of your business. If required, provide information about what the business is into.
- License Number: Provide the license number for your business.
- Business Contact Information: You will be asked to provide information about the communication channels for your business. This includes the telephone number, fax number, and email address.
- Business Ownership: Provide supporting documents on the ownership of the business. The details of the business owners or partners may also be required.
How to Report Your Taxes
Now that you have the EIN for your business, here are some tips on how to report your tax responsibilities:
Start Reporting Immediately
The tax responsibilities are calculated the moment you register or apply for an EIN. So, make sure you start the report on time.
- A Complete Guide To Commercial Real Estate Loans
- What is the Difference Between a Loan and a Mortgage?
- Important Aspects of Working Capital Loans You Should Know
Calculate the Taxes Accurately
Understand that different items or products have different taxes. Make an accurate calculation of these taxes so you can set the right sales taxes on those products.
File Your Taxes
Make hay to file your taxes on time and with the appropriate authorities.
The Employer Identification Number (EIN) helps your business place sales taxes on the items or products you sell. At the same time, you can use it to fulfill your sales tax responsibilities to the state. If there are changes in the structure of your business (either relocation or changes in ownership), report the same to the state tax authority for appropriate actions.