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.
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Q: I want to start a new onlinebusiness and don't really know where to start. Do I have to geta U.S. federal tax ID number? If so, where do I get one?
A: When you start an onlinebusiness, you have to think about designing a Web site, gettingtraffic and sales, and learning the ropes of e-commerce. The lastthing you probably want to think about is how federal tax law andstate laws may affect your business. And let's face it: Filingpaperwork for any new business can be intimidating. Documentationand official papers are often confusing and overlooked parts of thewhole startup process, but this doesn't mean they're notimportant.
What Is a Tax ID Number?
A federal tax identification number is a nine-digit numberassigned specifically to you that identifies your business to thegovernment. If your product or service involves tax in any way,you're required to get a tax ID number (also known as anEmployer Identification Number, or EIN). Therefore, if your statelevies a tax against your service, or if you are charging tax onyour product, it's in your best interest to apply for a tax IDnumber.
The government requires you to identify your business witheither a Social Security Number or the tax ID number on allgovernment 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 orAlcohol, Tobacco and Firearms.
- You withhold taxes on income, other than wages, paid to anonresident alien.
- You have a Keogh plan.
- You are involved with: trusts, IRAs, exempt organizationbusiness income tax returns, estates, real estate mortgageinvestment conduits, nonprofit organizations, farmers'cooperatives or plan administrators.
Another point to keep in mind is that many wholesaledistributors require either a federal tax ID or a state tax ID froma retailer. So if you want to take advantage of cheaper wholesalecosts and establish credibility with your suppliers, having a taxID 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 thenumber; however, every country has individual tax laws, so be sureto find out about your own. Because there is no penalty for usingthe tax number, yet there are many provisions requiring it,it's safest to just apply and get it out of the way early. Andbesides, 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.htmland download an application form. If you don't have anyemployees working for you, simply label the top of the application"For Identification Purposes Only." This will help youavoid any confusion at tax time.
What Other Paperwork Do I Need?
Another important document to file is a Fictitious NameStatement, also known as a D/B/A (doing business as) form. Thisform lets everyone know that you and your business are one and thesame, even if your business has a different name. Say you call yourbusiness Bungee Jumping for Beginners, for example. Your FictitiousName Statement will verify that Free Falling Fred is the individualresponsible 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 thecounty clerk's office for a fee of $50, and is important evenif it only serves to eliminate unnecessary confusion.
There may be other forms you will be required to file for youronline business, but again, this depends on where you live and whatkind of business you operate. A permit or license may even berequired to operate your business, depending on the town, city orstate you're in, even though you work from home.
The best course of action is to check with other homebasedbusiness owners in your area and your local and state governmentoffices to find out what must be filed. The IRS Web site is a greatplace to find information on documentation for your newbusiness.
Another important rule of thumb is to watch expiry dates on anyofficial corporate documents. Often, a document will have expiredjust when you need it the most.
Remember that for your business to be successful, rules andregulations need to be followed and monitored. Make sure you doyour homework, and good luck.
Corey Rudl, president and founder of the InternetMarketing Center is the author of the bestselling course Insider Secrets to Marketing Your Business on theInternet. An internationally sought-after Internet businessconsultant and speaker, Corey focuses his energy on the researchand development of practical, cost-effective Internet marketingstrategies and software for the small- and homebased businessowner.
The opinions expressed in this column arethose of the author, not of Entrepreneur.com. All answers areintended to be general in nature, without regard to specificgeographical areas or circumstances, and should only be relied uponafter consulting an appropriate expert, such as an attorney oraccountant.