The ABCs of Tax IDs A legal expert answers a host of perplexing tax ID questions.
By Cliff Ennico
Opinions expressed by Entrepreneur contributors are their own.
Until I started writing this column, I never knew howcomplicated something as simple as getting a tax ID number for yourbusiness 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 somereally tough questions:
"My husband and I will both own our new business. Is itbetter to get a tax ID number or use our social securitynumbers?"
While nothing prohibits you from doing business using yoursocial security numbers, most people don't like to give thatinformation out to strangers, so you're better off getting afederal tax ID number. The IRS doesn't charge for these.
"I'm shipping used machinery to Saudi Arabia, andthe shipping company is requesting that I provide my tax ID number.Is this normal? I've never before given anyone my tax IDnumber, and with all the identity thefts and scams, I'mconcerned."
It would be helpful to know if your shipper is located in theUnited States or not. If it is, there are two perfectly legalreasons why they may be requesting a tax ID number: (1) They wantto confirm that your shipment is exempt from state sales and usetaxes, or (2) they want to confirm that you're not engaged interrorist activities under the U.S. Patriot Act. If the shipper islocated outside the United States, I cannot fathom why they wouldneed a tax ID number from you, and you should feel free to ask themfor clarification.
"I'm from Argentina and am signing a contract with aU.S. company. They're asking me for a tax ID number, but Idon't have one, and my only address is in Argentina-Iwon't have any address in the U.S."
They're probably asking because they need to know whetheryour business will be subject to U.S. taxes, or if they mustwithhold U.S. taxes on payments made to your business. In eithercase, you'll need to obtain an Individual Tax IdentificationNumber, or ITIN, from the U.S. IRS by filling out and filing FormW-7, which is available in both English and Spanish. For furtherinformation on this topic, go to the IRS Web site at www.irs.gov and downloadPublication 1915, "Understanding Your Individual TaxpayerIdentification Number."
Keep in mind that an ITIN can only be used for U.S. taxpurposes; it cannot be used as identification for any other purpose(such as qualifying for U.S. citizenship or Social Securitybenefits). While you're there at the site, I would alsodownload Publication 515, "Withholding of Tax on NonresidentAliens and Foreign Entities," which explains how and when aU.S. company must withhold taxes on payments made to foreignbusinesses.
"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 opena separate bank account for it. When do you suggest the right timeis to do this?"
This depends on how your business is organized. If you're asole proprietorship, as I suspect, then you should open a separatechecking account when you're receiving so many checks that itwill be easier for your bookkeeper to keep track of them by havingthem in an account separate from your personal funds. If yourcompany is a corporation or limited liability company (LLC), youshould never co-mingle business and personal checks for fear oflosing the limited liability that these entities provide-thatbusiness account should be opened now, without delay.
"A friend and I were going to do contract work for acompany, and they asked for a tax ID number. We got one, but nowthe company tells us they don't want us to work for them afterall. Now that we have a tax ID number we won't be using, whatwill happen come tax time?"
If you identified your business as a "partnership" or"LLC taxed as partnership" when you applied for your taxID number, the IRS will be looking for a partnership return (Form1065) come April 15. If they don't get it, they'll sock youwith a "late payment penalty" that's currently $600per partner (so $1,200 in your case). What I would do is get holdof a copy of Form 1065 from the IRS' Web site, fill it in with a bunchof zeroes, check the "final return" box, and be sure tofile it before the April 15 deadline. That should put the IRS onnotice that your business is no more.
"Is a 'tax ID number' and an 'EINnumber' the same thing?"
The short answer is "yes." The technical name for afederal 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 MoneyHuntand a leading expert on managing growing companies. His advicefor small businesses regularly appears on the "Protecting YourBusiness" channel on Small Business Television Network. E-mail him atcennico@legalcareer.com. Thiscolumn is no substitute for legal, tax or financial advice, whichcan be furnished only by a qualified professional licensed in yourstate. Copyright 2004 Clifford R. Ennico. Distributed by CreatorsSyndicate Inc.
