When to Apply for an EIN as a Sole Proprietor

Sole Proprietor EIN Form

Most sole proprietors are allowed to file tax returns using a Social Security Number (SSN). If you’re a freelance writer or web designer, for instance, you’ve probably been filing returns with your SSN for years without any issue. However, many sole proprietors also apply for and use an Employer Identification Number (EIN) for tax purposes.

Why would you choose an EIN over your SSN? Some sole proprietors prefer the 9-digit EIN because it eliminates their concerns about identity theft. Supplying your SSN to multiple clients increases your chances of having the number (and with it, your credit identity) stolen. These concerns simply don’t exist with an EIN. In other circumstances, the law removes all choice and requires you to use an EIN for tax purposes. Here are some times when the IRS will ask you to use an EIN.

Paying Employees

You are required to obtain an EIN if you have employees. It doesn’t matter if you’re hiring an assistant, household employee, or someone to do your accounting. If the new hire will list you as their employer, and not a client, the same rules apply. Once you become responsible for withholding taxes from the people you hire and sending the funds to the IRS, the government requires you to have a valid EIN. Your EIN will be used to track your withholding payments and match them to your employees’ W-2s.

Opening Bank Accounts

Many banks will require an EIN to open a business bank account even if the IRS doesn’t require you to obtain one as a sole proprietor. If you want to keep your business and personal funds separate, you’re probably going to need to apply for an EIN. This helps banks verify that you’re actually running a legitimate business and regulate the account accordingly.

Establishing a Solo 401(k) Plan

Having a retirement plan also requires you to have an EIN. Because Keogh plans and Solo 401(k) plans have tax regulations–you guessed it–the IRS asks you to sign up using an EIN so they can better regulate your taxes and any potential penalties for early withdrawal.

Filling Out a W-9

If you need to fill out a Form W-9 for independent contractor or other sole proprietor income, the instructions for Form W-9 say “the IRS prefers that you use your SSN.” However, if you have an EIN for your sole proprietorship, simply enter that number instead.

Keep in mind that your EIN should only be used while you’re operating as a sole proprietor. If you file other income in the future earned at a full-time job, you should supply your SSN.