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Most small business owners have an employer identification number and a Social Security number. This allows the IRS to identify and account for their business entities. Obtaining these numbers also ensures individuals remain in compliance with tax laws. However some people may have an individual taxpayer identification number instead. Which numbers you have largely comes down to your immigration status.
Social Security numbers
A Social Security number, or SSN, is a nine-digit number issued to U.S. citizens and permanent residents. Over the course of one’s lifetime, the U.S. government will use this number to track your earnings and years employed. Once you are ready to retire, this number will be used by the U.S. government to determine the amount of Social Security benefits you receive.
SSNs protect a great deal of your personal information. As such, they are also susceptible to potential identity theft. It’s important to guard this number closely, or consider getting another, less sensitive federal ID as an added precaution.
What can business owners use SSNs for?
Before you owned a small business, your SSN played a key role in getting hired for new jobs or even obtaining a driver’s license. What can you use a Social Security number for as a small business owner?
Opening bank accounts: This is a requirement for both business and personal bank accounts at U.S. financial institutions. You may also use an employer identification number to open a business bank account.
Federal loan applications: Many entrepreneurs seek federal loans for small-business funding. This number is used to run a credit check and determine if you are eligible for a federal loan.
Filing annual tax returns: You may use an SSN or an employer identification number when filing your business's tax returns.
How to get an SSN
You will need to complete Form SS-5, Application for a Social Security Card in order to obtain an SSN. Form SS-5 is also available by calling 1-800-772-1213 or visiting your local Social Security office. To get an SSN, you must submit evidence of your identity, age and U.S. citizenship or lawful alien status. It is free to apply for an SSN.
What else should business owners know about SSNs?
U.S. residents typically do not need to worry about obtaining an SSN since they have already been issued one by the SSA. What they do need to consider is taking action to safeguard these numbers. It may be in their best interest to obtain an EIN next.
Employer identification numbers
An employer identification number, or EIN, is a nine-digit number issued by the IRS to identify a business entity. Once you have applied for an EIN, you may use this federal tax ID to legally identify your business. You may also continue using your SSN, too.
What can business owners use EINs for?
The uses for an EIN are numerous for entrepreneurs. Here are a few of the benefits of having (and using) one to identify your business.
Opening a business bank account: An EIN is required by most U.S. financial institutions before opening a business bank account.
Forming an LLC and hiring employees: The IRS advises that LLCs file for an EIN. And if an LLC has hired or intends to hire employees, it is required to have an EIN. What happens if you’re not planning to hire or have hired employees? Once the business has been incorporated, you are technically considered an employee. Therefore, you must have an EIN so that the IRS may track your business and ensure it remains in compliance.
If you decide to change your organization type: For example, if your business entity is changing from a single-member LLC to a member-managed LLC, you would need to fill out Form 8832 Entity Classification Election. This allows the entity to retain its EIN even though its federal tax classification has changed.
If you plan to establish business credit: Your business credit will be different from your personal credit — it’s based on your business's spending history and vendor relationships, among other factors.
Establishing pension, profit sharing and retirement plans: If you decide to create these plans, you are considered to be a plan administrator and will need an EIN.
How to get an EIN
You can apply for an EIN online, by phone, by fax and by mail through the IRS at no charge. All EIN applications must disclose the name and taxpayer identification number (SSN or individual taxpayer identification number) of the true principal officer, general partner, grantor, owner or trustor.
To apply online, visit the IRS website application page. Once the application is completed, the information is validated during the online session and an EIN is issued immediately.
Applying by mail takes four weeks, while applying by fax takes four days. You can apply by phone by calling 267-941-1099 (note, this is not a toll-free number) 6 a.m. to 11 p.m. Eastern time Monday through Friday.
Why should business owners obtain an EIN?
Did you know that once you have an EIN, it never expires? That’s just an added perk to obtaining this federal tax ID. Beyond the lack of expiration date, an EIN is also critical to safeguarding your SSN. You may use it in lieu of your SSN on various official documents pertaining to your business.
That being said, it’s important to protect your EIN just as much as you would an SSN. An EIN is still susceptible to identity theft, so be careful not to leave it written in plain sight where someone might see it.
Individual taxpayer identification number
If you are an individual who is required to file a U.S. tax return or present a federal tax ID but you don’t have an SSN and aren’t eligible for one, the IRS will issue an individual taxpayer identification number, or ITIN.
What can business owners use ITINs for?
An ITIN only has a few purposes, most of which center around staying in compliance with U.S. tax laws. According to the IRS, the shortlist of things one cannot do with an ITIN includes the following:
Having an ITIN does not mean you are authorized to work in the United States.
You will not be eligible for Social Security benefits just because you have an ITIN.
How to get an ITIN
To obtain an ITIN, you must complete IRS Form W-7, IRS Application for Individual Taxpayer Identification Number. W-7 requires documentation substantiating foreign/alien status and true identity for each individual. You can mail your documentation to the address shown in the Form W-7 instructions, present it at IRS walk-in offices or process your application through an acceptance agent authorized by the IRS. Acceptance agents are entities (colleges, financial institutions, accounting firms, etc.) that are authorized by the IRS to assist applicants in obtaining ITINs.
Why should business owners obtain an ITIN?
The only real purpose that an ITIN provides entrepreneurs is federal tax reporting. These numbers do not serve any other purposes for business owners. This is still an important function to ensure your U.S. tax returns have been filed, so if you know you need an ITIN, it is recommended that you apply for the number as quickly as possible.
Key differences between an EIN vs. ITIN vs. SSN
Now that you know what EINs, ITINs and SSNs are, let's compare all three from a business perspective to better understand how they can benefit you.
ITIN vs. SSN
Essentially, an SSN is for U.S. citizens and authorized noncitizen residents — such as green card holders and students on visas. An ITIN, on the other hand, is for residents with foreign status. This includes undocumented aliens and nonresident aliens that conduct business in the United States. Foreign entities that operate in the United States, including corporations, partnerships and LLCs, would also need an ITIN.
EIN vs. SSN
An EIN is like an SSN for your business. For those simply operating sole proprietorships, they can use their SSN with the IRS for tax purposes and to open a business bank account. If you form an LLC, want to hire employees or would like to establish business credit, though, you'll need to obtain an EIN.
EIN vs. ITIN
The main difference between an EIN and an ITIN is that an EIN is used to identify a business, while an ITIN is a federal tax ID for folks who must file a tax return but who are not allowed to work in the United States. Individuals who do business in the U.S. but are ineligible for SSNs need ITINs.
This article originally appeared on Fundera, a subsidiary of NerdWallet.
Deborah Sweeney contributed to this article.