The Federal Employer Identification Number (FEIN), also known as the Employer Identification Number (EIN) or Federal Tax Identification Number, is a unique nine-digit identifier assigned by the Internal Revenue Service (IRS) to businesses operating in the United States for tax-related purposes.
This number, sometimes referred to as the Business Tax ID, Business Taxpayer ID, or Federal Business Tax ID, is essential for tax filings, completing various tax-related documentation, shifting a business to another state, and enabling the easier operation of a business in numerous aspects.
Interchangeability and Exception of the Terminologies
It’s important to note that while FEIN and EIN are interchangeable terms, the exception lies in using “EIN” to denote a state tax identification number in some instances. Some states (e.g. California) mandate a separate state tax ID number to pay state-specific taxes, while others utilize the Federal Tax ID number for taxation purposes. In short – an FEIN is synonymous with an EIN except when the abbreviation EIN is utilized to denote a state tax identification number.
Do You Need a FEIN?
According to Publication 1635 (Rev. 2-2014), Catalog Number 14332x of the IRS, different business structures, such as corporations, partnerships, estates/trusts, LLCs, and employee plans/exempt organizations, typically require a FEIN for taxation purposes.
Changes in structure like incorporating, shifting from single to multi-membership, or altering tax classifications often necessitate a new FEIN. However, for some alterations like name or location changes without fundamental structural shifts, acquiring a new FEIN might not be mandatory. Sole proprietorships usually don’t require a separate FEIN unless they change to a partnership, while corporations and partnerships commonly need an FEIN. Trusts undergoing transitions, such as from revocable to irrevocable, might require an FEIN change. Entities offering employee benefits or functioning as tax-exempt often require an FEIN, subject to specific regulations. Overall, alterations impacting the core structure typically trigger the need for a new FEIN, while nominal changes might not mandate it.
Legal Importance of Obtaining FEIN
As per IRS provisions, obtaining a Federal Employer Identification Number (FEIN) is mandatory under specific circumstances. If an entity has employees, operates as a corporation or partnership, or files tax returns such as Employment, Excise, or Alcohol, Tobacco, and Firearms, it is required to have an FEIN. Additionally, if taxes other than wages are withheld for non-resident aliens, if the entity is involved with a Keogh plan, or associated with various organizations like trusts (excluding certain grantor-owned revocable trusts), IRAs, Exempt Organization Business Income Tax Returns, estates, real estate mortgage investment conduits, non-profit organizations, farmers’ cooperatives, or plan administrators, a FEIN is necessary.
Failure to obtain an FEIN, despite falling under these categories, exposes the entity to potential tax penalties and non-compliance issues with IRS regulations. Therefore, having an FEIN is crucial for proper tax reporting and compliance with IRS requirements.
In other words, an FEIN legally entitles you to:
- Hire employees,
- Operate your business as a corporation or a partnership,
- File any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms,
- Withhold taxes on income, other than wages, paid to a non-resident alien,
- Have a Keogh plan,
- Involved with various types of organizations (e.g. Estates, NPOs, Farmer’s cooperatives)
It also enables you to:
- Apply for a business license,
- Prevent identity theft.
Practical Significance of Obtaining FEIN
Some businesses might be exempted from obtaining an FEIN for their nature and modus operandi; however, if your business falls in those categories, even then you should opt to obtain an FEIN though this might not be required by law, as having FEIN indeed has some practical benefit.
- Professional Image: Having a FEIN can enhance the professional image of your business from the vendor to the clients. It demonstrates legitimacy and shows that your business is duly registered with the IRS, potentially instilling trust among customers, partners, and suppliers.
- Smooth Financial Operations: FEIN holds significant importance in diverse financial dealings and regulatory engagements. When initiating bank account setups, seeking credit, or engaging in various financial transactions, businesses are frequently asked to furnish their FEIN. This identifier allows financial institutions to authenticate the business’s validity and ensure distinct segregation between personal and business finances.
- Online Tax Submission: FEIN enables the holder to register for the Electronic Federal Tax Payment System (EFTPS) to conveniently submit tax payments either online or via phone.
Conclusion
Acquiring a FEIN is crucial for businesses, ensuring legal compliance and offering practical benefits. From tax adherence to enhancing credibility, easing financial transactions, and providing legal protection, having a FEIN streamlines operations, protects personal assets, and aids navigation through legal and financial landscapes.
