Thanks to the gigeconomy, a growing number of people are inspired to take control of theirfinancial future by starting their own business. One of the first things theyask themselves is, “Do I need a tax ID number for my business?”
In most cases, theanswer to that question is yes. But there are exceptions.
TaxID Numbers Explained
The Internal RevenueService (IRS) uses taxpayer identification numbers to trackpayments to individuals and businesses for tax purposes. There are threeprimary types:
- Social Security Number (SSN): assigned to U.S.citizens and some permanent residents to track their income and determineeligibility for benefits.
- Individual Taxpayer ID Number (ITIN): issuedto individuals who need to have a U.S. taxpayer identification number but whodo not have, and are not eligible for a Social Security number.
- Employer ID Number (EIN): used to identifybusiness entities. Although it refers to ‘employer identification’, businesseswithout employees may also need an EIN.
In general, you willneed a tax ID number (EIN) if your product or service involves any form oftaxation. (For example, if you charge tax or your state levies a tax againstyour offering.) An EIN is also required if:
- Your business has employees
- You withhold taxes on income(except wages) that you pay to a nonresident alien
- You run a corporation orpartnership
- You file employment, excise orAlcohol, Tobacco and Firearms tax return
- You have a Keogh plan
- Your work involves IRAs, trusts,estates, plan administrators, farmers’ cooperatives, nonprofit organizations,real estate mortgage investment conduits, and business income tax returns forexempt organizations
EINs are also usedto:
- Open a business bank account
- Apply for a business loan
- Obtain business licenses andpermits
- Report and remit federal payrolltaxes
Some wholesaledistributors will require you to have a federal or state tax ID in order totake advantage of more affordable wholesale costs.
WhatAbout Sole Proprietors?
If you run a soleproprietorship or single-member LLC with no employees, you can use your Social Security number as thetax ID for your business, as the company files and pays income taxes throughyour personal tax returns. The only exception to this general rule would be ifyou file pension or excise tax returns.
TaxID Numbers For New Jersey Businesses
If you do businessin New Jersey, you will need to get a state tax identification number,which is issued when you register with the Division of Revenue and EnterpriseServices. All limited partnerships, corporations, and LLCs formed in the stateneed to register using their EIN. If you have a sole proprietorship orpartnership with employees, you are also required to register using an EIN. Theonly exceptions to this requirement are:
- Sole proprietorships andpartnerships without employees
- Out of state business entities whoemploy New Jersey residents or need a Business Registration Certificate toapply for a state contract.
In New Jersey, allvendors, even one-time operations and seasonal businesses, have to register fora state tax ID number at least 15 days before commencing operations. Onceregistered, you have to file all necessary returns until your tax registrationofficially ends.
Although you may notneed a federal tax ID for your business, applying for one is free and itsimplifies the process of opening a company bank account and applying forfinancing. In this respect, a tax ID is like insurance: you may never need it,but if you do, you’ll be glad that you took the initiative.
Speakwith a New Jersey Tax ID Attorney
The IRS uses yourSSN/EIN to track your business earnings and verify that you are paying allobligatory taxes. Consequently, you may be targeted for an audit and assessedan amount that you don’t agree with or can’t afford.
If that happens,reach out to the experienced tax team at Paladini Law by calling 201-381-4472or filling out our online form. Attorney BradPaladini will help you appeal the assessment or negotiate an IRS payment plan or New Jersey installment agreement that allowsyou to manage your tax liability while you continue to grow your business.