Business Tax ID Number – FEIN and EIN Explained

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federal-tax-identification-number-EIN-graphic There is an unfortunate amount of confusion surrounding the concept of the Federal Tax Identification Number. It is ironic, because the whole Tax ID, FEIN, and EIN thing is actually very simple, mostly because they are generally all the same thing. However, it isn’t surprising that this concept confused many personal finance students because when it comes to things like laws and taxes, tiny variations in terms usually mean very different things.

What is a Tax ID Number?

Tax ID Number, or Tax Identification Number, and the like, all refer to the same thing. When taxes are filed, whether they are personal income taxes, or business income taxes, there must be a unique identifier used on the tax return. Likewise, if income is reported, that income must be reported to the IRS with a unique number identifying who it was paid to.

In the case of Federal Income Taxes, the tax ID number is a Social Security Number. However, businesses do not have SSN, so they need a different unique number to use for identification purposes on tax documents.

FEIN stands for Federal Employer Identification Number. It’s “brother” is the EIN which stands for Employer Identification Number.

What Is The Difference Between an EIN and a FEIN?

Let’s start with the easiest part of the tax number concept to understand. There is no difference between a FEIN and a EIN.

To be more technically correct, there is no such thing as a FEIN. While there may be State based employer identification numbers, the Federal Government makes no allowance for them in its official terminology or within the tax code. Thus, if someone is talking about Federal and state tax ID numbers, then they are technically discussing Employer Identification Numbers (EIN) and State Employer Identification Numbers. In other words, there is no “Federal” label for official purposes.

The arbiter of all taxable information and tax numbers is the Internal Revenue Service. No one else counts when it comes to Federal Income Taxes. It is not surprising then, that the IRS is who issues EINs or Federal Tax Identification Numbers.

Do I Need an EIN (Employer Identification Number)?

For many entrepreneurs, their small business is a separate legal entity. Such a business structure limits personal liability for business owners, whether it is via a S Corp, Limited Liability Partnership (LLP), or Limited Liability Company (LLC). In some cases, a business tax ID number is required. In others, it can be optional.

The thing that throws most people and generates plenty of questions for those who provide personal financial advice and tips, is the word “employer.” Many entrepreneurs have small businesses which have no employees, or only family members as employees. Thus, the inevitable question is whether or not such a business requires an EIN.

Despite the name, an EIN is merely an identification number used for tax purposes. While only businesses with employees are required to get an EIN, businesses without employees can use them as well.

In fact, every small business owner should get an EIN tax ID number whether they have any employees or not. This is not only good business practice, it is also very necessary in order to protect privacy and prevent identity theft.

Whenever a business pays more than $400 in a calendar year to a business, whether a small business or otherwise, they are required to report that payment to the IRS. To do so, they must file an IRS form that, not surprisingly, requires the recipient’s tax ID number to be listed. As a small business owner, you have two choices:

  1. Use Your Own Social Security Number
  2. Use a Tax ID Number or EIN

It shouldn’t be rocket science why you don’t want to be handing your SSN out all over the place. Obviously, if your business is a small sideline thing and you only do work for people you know and trust, or well-known reliable companies, then the risks are lower. However, the fewer places you can give out your social as you go through life, the better.

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9 Comments on Business Tax ID Number – FEIN and EIN Explained

  1. L A Pruitt says:

    After working with trying to figure this out for almost a whole month now, this is the first site I have come across that actually helped me to make perfect sense of the whole concept. Thank you so much for the needed information and have an awsome day.

  2. Kelly says:

    Thanks so much for the clearly given information. Easy to understand!

  3. LTR says:

    I just changed my business from a sole proprietor to an LLC. I didn’t think I needed a new EIN, but I was reading earlier that if I plan on hiring employees( and I do…fairly soon), that I need to get a new EIN. Is that true?

    • You can get an EIN even if you do not have employees.
      You must have an EIN if you do have employees. You’ll need that number to do all of their payroll taxes and to get all of your deductions.

  4. Theresa Farr says:

    I just joined a gcroup who has an EIN number and are asking for donations, but said they are not tax deductable. Are they or are they not?

    • EIN numbers are for identifying business entities. They are not necessarily non-profits, which would be tax deductible. While you do need the EIN number to deduct contributions to a non-profit, not all entities with an EIN are non-profits. For most deductions, it will need to be a 403(b) organization, with certain exceptions. If they say they are not deductible, then they almost certainly are not, at least not as charitable deductions.

  5. […] businesses have forms and paperwork they have to file. Most small businesses have an EIN from the IRS. Many others also have to file some paperwork with their State. The forms to create your business […]

  6. […] Get a Tax ID number instead of your SSN. Working from home in this manner means being an independent contractor. Get a […]

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