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The ABCs of Tax IDs

A legal expert answers a host of perplexing tax ID questions.

Until I started writing this column, I never knew how complicated something as simple as getting a tax ID number for your business could be. As they used to say on the old "Laugh-In" TV show from the 1960s, here is a "pot-pourri" of e-mails from people wrestling with some really tough questions:

"My husband and I will both own our new business. Is it better to get a tax ID number or use our social security numbers?"

While nothing prohibits you from doing business using your social security numbers, most people don't like to give that information out to strangers, so you're better off getting a federal tax ID number. The IRS doesn't charge for these.

"I'm shipping used machinery to Saudi Arabia, and the shipping company is requesting that I provide my tax ID number. Is this normal? I've never before given anyone my tax ID number, and with all the identity thefts and scams, I'm concerned."

It would be helpful to know if your shipper is located in the United States or not. If it is, there are two perfectly legal reasons why they may be requesting a tax ID number: (1) They want to confirm that your shipment is exempt from state sales and use taxes, or (2) they want to confirm that you're not engaged in terrorist activities under the U.S. Patriot Act. If the shipper is located outside the United States, I cannot fathom why they would need a tax ID number from you, and you should feel free to ask them for clarification.

"I'm from Argentina and am signing a contract with a U.S. company. They're asking me for a tax ID number, but I don't have one, and my only address is in Argentina-I won't have any address in the U.S."

They're probably asking because they need to know whether your business will be subject to U.S. taxes, or if they must withhold U.S. taxes on payments made to your business. In either case, you'll need to obtain an Individual Tax Identification Number, or ITIN, from the U.S. IRS by filling out and filing Form W-7, which is available in both English and Spanish. For further information on this topic, go to the IRS Web site at www.irs.gov and download Publication 1915, "Understanding Your Individual Taxpayer Identification Number."

Keep in mind that an ITIN can only be used for U.S. tax purposes; it cannot be used as identification for any other purpose (such as qualifying for U.S. citizenship or Social Security benefits). While you're there at the site, I would also download Publication 515, "Withholding of Tax on Nonresident Aliens and Foreign Entities," which explains how and when a U.S. company must withhold taxes on payments made to foreign businesses.

"I've just applied for a tax ID number from the IRS. Right now, my business is still so new that I have no need to open a separate bank account for it. When do you suggest the right time is to do this?"

This depends on how your business is organized. If you're a sole proprietorship, as I suspect, then you should open a separate checking account when you're receiving so many checks that it will be easier for your bookkeeper to keep track of them by having them in an account separate from your personal funds. If your company is a corporation or limited liability company (LLC), you should never co-mingle business and personal checks for fear of losing the limited liability that these entities provide-that business account should be opened now, without delay.

"A friend and I were going to do contract work for a company, and they asked for a tax ID number. We got one, but now the company tells us they don't want us to work for them after all. Now that we have a tax ID number we won't be using, what will happen come tax time?"

If you identified your business as a "partnership" or "LLC taxed as partnership" when you applied for your tax ID number, the IRS will be looking for a partnership return (Form 1065) come April 15. If they don't get it, they'll sock you with a "late payment penalty" that's currently $600 per partner (so $1,200 in your case). What I would do is get hold of a copy of Form 1065 from the IRS' Web site, fill it in with a bunch of zeroes, check the "final return" box, and be sure to file it before the April 15 deadline. That should put the IRS on notice that your business is no more.

"Is a 'tax ID number' and an 'EIN number' the same thing?"

The short answer is "yes." The technical name for a federal tax number is an Employer Identification Number, or EIN, even if you don't have employees in the technical sense.


Cliff Ennico is host of the PBS TV series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on Small Business Television Network. E-mail him at cennico@legalcareer.com. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. Copyright 2004 Clifford R. Ennico. Distributed by Creators Syndicate Inc.

Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.

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