Does Your E-Business Need a Tax ID?
Not necessarily. But here's how to know if registering with state or federal tax agencies is required.
Q: I want to start a new online business and don't really know where to start. Do I have to get a U.S. federal tax ID number? If so, where do I get one?
A: When you start an online business, you have to think about designing a Web site, getting traffic and sales, and learning the ropes of e-commerce. The last thing you probably want to think about is how federal tax law and state laws may affect your business. And let's face it: Filing paperwork for any new business can be intimidating. Documentation and official papers are often confusing and overlooked parts of the whole startup process, but this doesn't mean they're not important.
What Is a Tax ID Number?
A federal tax identification number is a nine-digit number assigned specifically to you that identifies your business to the government. If your product or service involves tax in any way, you're required to get a tax ID number (also known as an Employer Identification Number, or EIN). Therefore, if your state levies a tax against your service, or if you are charging tax on your product, it's in your best interest to apply for a tax ID number.
The government requires you to identify your business with either a Social Security Number or the tax ID number on all government forms and official documents.
You will need an EIN if:
- You have employees.
- Your business is a corporation or a partnership.
- You file any of these tax returns: Employment, Excise or Alcohol, Tobacco and Firearms.
- You withhold taxes on income, other than wages, paid to a nonresident alien.
- You have a Keogh plan.
- You are involved with: trusts, IRAs, exempt organization business income tax returns, estates, real estate mortgage investment conduits, nonprofit organizations, farmers' cooperatives or plan administrators.
Another point to keep in mind is that many wholesale distributors require either a federal tax ID or a state tax ID from a retailer. So if you want to take advantage of cheaper wholesale costs and establish credibility with your suppliers, having a tax ID is a good idea.
International companies will not require you to have an EIN, provided their business does not include any U.S.-based employees. Simply shipping products to the United States does not require the number; however, every country has individual tax laws, so be sure to find out about your own. Because there is no penalty for using the tax number, yet there are many provisions requiring it, it's safest to just apply and get it out of the way early. And besides, getting your tax ID number is free.
How Do I Apply?
To apply, talk to your local IRS office and ask for Form SS-4, or visit http://www.sba.gov/starting_business/taxes/ein.html and download an application form. If you don't have any employees working for you, simply label the top of the application "For Identification Purposes Only." This will help you avoid any confusion at tax time.
What Other Paperwork Do I Need?
Another important document to file is a Fictitious Name Statement, also known as a D/B/A (doing business as) form. This form lets everyone know that you and your business are one and the same, even if your business has a different name. Say you call your business Bungee Jumping for Beginners, for example. Your Fictitious Name Statement will verify that Free Falling Fred is the individual responsible for the bungee jumping site, whenever any financial, legal or other official transactions take place.
Depending on where you live, this form is usually filed with the county clerk's office for a fee of $50, and is important even if it only serves to eliminate unnecessary confusion.
There may be other forms you will be required to file for your online business, but again, this depends on where you live and what kind of business you operate. A permit or license may even be required to operate your business, depending on the town, city or state you're in, even though you work from home.
The best course of action is to check with other homebased business owners in your area and your local and state government offices to find out what must be filed. The IRS Web site is a great place to find information on documentation for your new business.
Another important rule of thumb is to watch expiry dates on any official corporate documents. Often, a document will have expired just when you need it the most.
Remember that for your business to be successful, rules and regulations need to be followed and monitored. Make sure you do your homework, and good luck.
Corey Rudl, president and founder of the Internet Marketing Center is the author of the bestselling course Insider Secrets to Marketing Your Business on the Internet. An internationally sought-after Internet business consultant and speaker, Corey focuses his energy on the research and development of practical, cost-effective Internet marketing strategies and software for the small- and homebased business owner.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
Corey Rudl, president and founder of the Internet Marketing Center is the author of the best-selling course Insider Secrets to Marketing Your Business on the Internet. An internationally sought-after Internet business consultant and speaker, Corey focuses his energy on the research and development of practical, cost-effective Internet marketing strategies and software for the small and homebased business owner.