One advantage of sole proprietorships is that they’re easy to establish. Unlike other business structures, you don’t need to file any paperwork or pay fees to get started. But that doesn’t mean you should automatically assume you don’t need an employer identification number (EIN).
While many sole proprietors may think EINs are only for multi-person operations, the reality is more nuanced. Sole proprietorships can have employees, but even if you’re operating solo, there are plenty of other contexts where you might want to obtain an EIN. Whether you’re a freelance graphic designer working from your kitchen table or a consultant serving Fortune 500 clients, understanding when—and why—you might need this nine-digit ID number could make a difference come tax season.
What is an employer identification number (EIN)?
An employer identification number (EIN) is a nine-digit number that lets government agencies identify businesses and track their tax obligations. Banks and other financial institutions often use EINs to determine if businesses qualify for banking services, business loans, and business credit cards.
An EIN is similar to a Social Security number (SSN). Both are federal tax identification numbers, but the US Social Security Administration issues SSNs to individuals, and the IRS assigns EINs to businesses, nonprofits, estates, trusts, or other organizations. If your sole proprietorship doesn’t have an EIN, the government will link your business to your personal SSN.
4 reasons your sole proprietorship might need an EIN
- Hiring employees
- Investing in a self-employed retirement plan
- Working with nonprofits
- Converting to a partnership or a limited liability company (LLC)
A sole proprietorship is the simplest business structure available to entrepreneurs in the US. The IRS will automatically classify you as a sole proprietorship if you start a business as the only owner and do not choose another structure. The IRS does not consider you and your sole proprietorship separate entities. Often, running a sole proprietorship does not require small business owners to obtain an EIN for tax purposes.
However, there are several circumstances where you might need an EIN, including:
1. Hiring employees
While only one person can own a sole proprietorship, that person can hire employees. And when your sole proprietorship grows beyond a one-person operation, an EIN becomes mandatory. The moment you hire your first employee—full time, part time, even seasonal—the IRS requires that you obtain an EIN to properly report employment taxes, such as payroll taxes.
With an EIN, you can withhold federal income tax, Social Security, and Medicare contributions from employee paychecks while also fulfilling your employer tax obligations. Without an EIN, you cannot establish payroll, provide W-2 forms when tax time comes around, or pay federal taxes on behalf of employees—potentially exposing your sole proprietorship to major tax penalties and compliance issues.
2. Investing in a self-employed retirement plan
Working for yourself doesn’t mean missing out on valuable retirement investing. Sole proprietors looking to maximize their retirement savings often turn to self-employed retirement plans (formerly referred to as “Keogh plans” by the IRS). The IRS recognizes a variety of self-employed retirement plans, including:
- Simplified employee pension (SEP). Contribute up to 25% of your net earnings from self-employment, up to a maximum of $69,000 in 2024.
- One-participant 401(k) plan. Also known as a solo 401(k), this plan allows you to contribute up to 100% of self-employed earnings, up to $23,000 in 2024. These are only available when there are no employees of the sole proprietorship other than your spouse.
- Savings Incentive Match Plan for Employees (SIMPLE IRA plan). Contribute all self-employment earnings, up to $16,000 in 2024, plus $3,500 if you’re older than 50 and a 2% fixed contribution or 3% matching contribution.
3. Working with nonprofits
If you collaborate with or provide services to nonprofit organizations, your business might need an EIN. Some nonprofits require vendors and contractors to provide an EIN rather than an SSN for grant compliance, financial reporting, and audit purposes. If working with nonprofits is important to your sole proprietorship venture, having an EIN can be an essential consideration for contracts, grant-funded projects, and ongoing relationships with these entities.
4. Converting to a partnership or a limited liability company (LLC)
Over time, you may find that the sole proprietorship structure no longer serves your business needs or goals. If you decide to transition from a sole proprietorship to a more complex business structure, such as an LLC, a corporation, or a partnership, an EIN becomes non-negotiable. These entity types are legally distinct from their owners, requiring separate tax identification. Even though a single-member LLC typically handles taxes in the same way as a sole proprietorship, the IRS and state tax authorities consider the owner and the business to be separate legal entities.
Securing an EIN before or during the early stages of this transition ensures proper business tax filing and shields personal assets from business liabilities in many circumstances as your business grows and evolves.
Check the IRS website for a complete list of reasons to get an EIN.
4 benefits of getting an EIN (even if it’s not required)
- Identity theft protection
- Obtaining business bank accounts and establishing business credit
- Tracking personal vs. business taxes
- Building business credibility
Even if you don’t legally need an EIN for your sole proprietorship, there are benefits to getting one. These include:
1. Identity theft protection
Your SSN is one of the most important pieces of identifying information about you. As an independent contractor without an EIN, you’ll need to disclose your SSN to clients on a W-9 tax form. Data breaches can happen. With an EIN, you can protect your SSN and maintain a unique tax ID for your sole proprietorship.
2. Obtaining business bank accounts and establishing business credit
If you plan on using a separate business bank account to handle funds and business transactions for your sole proprietorship, you’ll find that many banks and financial institutions require you to obtain an EIN to open an account. Having a business checking account to keep your business finances and personal finances separate can make filing taxes more straightforward and help you get approved for loans and other financing when the time comes. (Some lenders may even require it.)
Having an EIN will also allow you to apply for a business credit card as a sole proprietor. Business credit is separate from personal credit, and using a credit card for business purposes can help you establish business credit history that banks and lenders will then refer to when you apply for a loan or other financing.
3. Tracking personal vs. business taxes
Using an EIN to file business taxes can help you organize and track business tax obligations separately from personal taxes. This may be helpful if your sole proprietorship is subject to payroll taxes if you have employees, property taxes if your sole proprietorship owns real estate, sales tax, and excise taxes.
4. Building business credibility
Having an EIN can project a more favorable, professional business image in the eyes of potential partners, clients, and financial institutions. Many clients and vendors perceive sole proprietorships with EINs as more established and professionally managed than those without. Your willingness to go this extra step and create a critical layer of separation between your personal and business life may demonstrate a higher commitment to proper business operations and due diligence.
How to apply for an EIN
The EIN application process is fairly straightforward. You can apply using the IRS online tool. On the EIN application, identify the “responsible party” (you), then provide your SSN, legal residence information, and signature. You will also have to provide a business mailing address, designate an applicant entity type (sole proprietorship), specify your principal business activity, and indicate whether you plan to hire employees.
If you apply online, assuming all required information is complete and correct, you should receive your EIN instantly. Once you have your EIN, you can use it for your business needs, including opening a business account at a bank or applying for business licenses.
Do sole proprietors need an EIN FAQ
How can I look up my EIN?
The IRS-issued confirmation letter is the best way to keep track of your EIN. If you don’t have it, review your previous tax returns or the forms you filled in to apply for a business bank account or credit card. If you still can’t find your EIN, call the IRS for an over-the-phone look up.
Is there a downside to getting an EIN?
The downside is the paperwork and maintenance. Some sole proprietors find that having an EIN isn’t worth the work when their business remains small or runs intermittently. Additionally, EINs are not protected information. While the IRS doesn’t maintain a database of EINs accessible to the public, the agency does not consider the number confidential.
Does a sole proprietor with an EIN get a 1099?
Yes, a sole proprietor with an EIN who has properly filed a W-9 with a client at the start of the business relationship (and kept filings up to date to reflect address or name changes, etc.) should expect to receive a 1099 every year they are paid for services rendered to that client.
