EIN vs. SSN: Decoding Tax IDs for the Self-Employed

Diving into the realm of self-employed taxes can feel like deciphering an alphabet soup of acronyms—EIN, SSN, W9, 1099-NEC, and Schedule C, among others. One of the most common challenges independent contractors face is figuring out the right tax identification number for their business, be it an Employer Identification Number (EIN) or a Social Security Number (SSN). 

According to the U.S. Census Bureau, over 5 million people started new businesses in 2022. All of these entrepreneurs had to ask themselves the question: "Should I use my SSN or an EIN?" It's a big decision that can significantly impact your business’s legal, financial, and operational aspects. This article will untangle this crucial choice, exploring the considerations you should keep in mind.

What is an EIN?

An Employer Identification Number (EIN), or Federal Tax Identification Number, is a nine-digit number issued by the Internal Revenue Service (IRS). The EIN is used to identify a business entity for tax reporting and administration purposes. 

Various businesses use EINs, including corporations, partnerships, limited liability companies (LLCs), and sole proprietorships.

You may need an EIN for various reasons, including:

• Hiring employees: If you plan to hire employees for your business, you must get an EIN to report their wages and withhold taxes.

• Changing business structure: If you change your business structure, such as transitioning from a sole proprietorship to a corporation or partnership, you will need an EIN.

• Opening a bank account: Many financial institutions require an EIN to open a business bank account, apply for loans, or establish lines of credit.

• Filing tax returns: Businesses with an EIN must use it when filing federal tax returns, reporting income, and claiming deductions or credits.

• Obtaining licenses and permits: Some local and state government agencies may require an EIN when applying for specific licenses or permits.

There are a few methods to apply for an EIN:

• EIN Application Portal: The IRS website is the fastest and most convenient option, where you receive your number immediately upon completion.

• Fax/Mail: You can fax or mail a completed Form SS-4 to the IRS. Applying by mail takes longer, with processing times averaging around four weeks.

• Telephone: International applicants without a legal residence in the U.S. or a principal place of business can apply for an EIN by calling +1-267-941-1099 during weekdays. You’ll receive your number at the end of the call.

What is an SSN?

A Social Security Number (SSN) is a nine-digit number issued to U.S. citizens, permanent residents, and temporary working residents by the Social Security Administration (SSA). The primary purpose of an SSN is to track individuals for taxation and Social Security benefits. But it has also become a vital identification tool used across various sectors such as banking, employment, and applying for government benefits.

To get an SSN, you must submit a completed Form SS-5 to the SSA. The application must include proof of your identity, age, and U.S. citizenship or legal immigration status. Processing times for SSN applications may vary but generally takes a few weeks.

What’s the difference between EIN and SSN?

When comparing EIN and SSN for your tax ID needs, consider the differences in legal implications, tax liabilities, and privacy concerns.

Legal implications

An EIN is like your business's unique fingerprint in the world of taxes and finances. Think of it as an SSN for your business—it distinguishes your company from others and allows the IRS to monitor your tax reporting and filings. 

It also helps separate your personal and business finances, which can better protect your assets in case of business liabilities. Remember, you’ll need an EIN if you change your business structure, hire employees, or need specific licenses and permits.

Using your SSN for business means you intertwine your personal and business finances, making it challenging to separate liabilities. This can expose you to additional risks, as your assets may be vulnerable in case of business debts or legal issues. As a sole proprietor, you are responsible for all business debts and legal obligations.

Tax liabilities

When filing federal tax returns, reporting income, and claiming deductions or credits for your business, you can use an EIN or SSN. However, having an EIN makes it easier to differentiate between personal and business expenses, which is crucial for accurate tax reporting. 

Additionally, using an EIN allows you to apply for an Individual Taxpayer Identification Number for any non-resident alien partners, which helps streamline tax filings.

Self-employed individuals who do not have an EIN must use their SSN when filing self-employment taxes. This can make it more challenging to separate personal and business expenses. The lack of separation can lead to confusion and disorganization in financial records, increasing the risk of errors in tax reporting.

Privacy and personal information

In 2022, data breaches impacted more than 422 million people. Some of those victims were likely freelancers or gig workers using their SSNs, making them victims of preventable identity theft.

Using your SSN for business increases the risk of identity theft and fraud. For instance, as a 1099 contractor, you must often provide your SSN on W-9 forms when working with clients, exposing your sensitive personal information. An EIN offers privacy benefits because it minimizes the need to share your SSN.

How to choose between EIN and SSN

Deciding between using an EIN or an SSN for your 1099 work comes down to assessing your business needs now and in the future. To help you make the right choice, ask yourself these six questions:

• What is the structure of my business (sole proprietorship, partnership, corporation, or LLC)? Your business structure plays a crucial role in determining whether you need an EIN or can continue using your SSN.

• Do I plan to hire employees now or in the future? If you plan to hire employees, you'll need an EIN to report their wages and withhold taxes.

• Are there legal requirements in my jurisdiction that necessitate an EIN? Some local and state government agencies may require an EIN when applying for specific licenses or permits. Research the legal requirements on your state’s official website to determine if an EIN is necessary for your small business operations.

• What are my growth plans? If you anticipate expanding your business by forming partnerships, seeking investors, or restructuring your business entity, having an EIN is essential. Obtaining an EIN early on can streamline these processes and save time later.

• Do I feel comfortable sharing my SSN with clients and vendors? Using your SSN for business increases the risk of identity theft and fraud. Consider obtaining an EIN to protect your personal information and minimize privacy risks.

• Do I intend to open a business bank account or seek business financing? Many financial institutions require an EIN to open a business bank account, apply for loans, or establish lines of credit. An EIN can help separate your personal and business finances.

Manage your tax responsibilities with Found

Choosing between an EIN and an SSN doesn’t change your tax responsibilities. And that’s where Found comes in. Built to simplify self-employment, Found's all-in-one platform ensures you're always prepared for tax season. 

By providing tax estimates, tracking write-offs, and auto-withholding for taxes directly from the app, Found makes it easy for self-employed professionals to take control of their financial future. Sign up for Found and manage your taxes with ease.

The information on this website is not intended to provide, and should not be relied on, for tax advice. Found does not offer legal advice.