If you are a freelancer, you might often be asked...or you find yourself asking if you want to get an EIN (Employer Identification Number). You hear about it everywhere and you are not sure where to begin or how it can help you make your business finances less complicated.
If you worked for a long time under 1099 you might get asked to get EIN and your Social security number for tax purposes. But do freelancers really need this? Is getting this number mandatory?
Is EIN when freelancing beneficial for you? You might be pleasantly surprised by the response.
Let us explain everything in this comprehensive guide on what getting an EIN means for you, how to get it, and which mistakes to avoid.
An Employer Identification Number is a number issued by the IRS to all business entities that applied for getting one online via their website. It is a unique identifier consisting of nine digits and it helps with identifying and tracking the tax responsibilities of business entities.
Which business entities often use EIN? It is used both by companies and solopreneurs. Obtaining an Employer Identification Number is free and pretty easy to get - never use a third-party website to obtain this number or you are risking being scammed.
Obtaining EIN helps the IRS to get the information about your revenue gained through invoices. It is strictly connected to your business finances, not your personal records such as credit history, medical records, and more.
Being a freelancer carries some unique risks compared to working for a company. Since you are working alone it is up to you to find and maintain business relationships. Freelancers indeed have more freedom to do what they like and get paid but there are also some sides that are not so great.
The economic situation is constantly changing for example and getting health insurance is never an easy task. Also, freelancers are facing the threat of getting their identity stolen, therefore getting their reputation ruined.
Since freelancers are asked to provide their social security number when submitting the W9 or 1099 form, it increases the chances of getting their sensitive data stolen. Therefore getting EIN can help you decrease this risk tremendously. You can never be sure if your client is cautious enough about your sensitive data.
Having your employer identification number is also important if you are using applications such as PayPal and Venmo. These applications offer easier ways to invoice your clients. And the IRS has more detailed information about payment volumes received through these applications.
You are obligated to keep track of payment volumes and notify IRS if you meet or exceed the limit of 200 annual payments through these applications. The other case is if your annual payment volume reached or exceeded $20000.
If you are thinking ‘’Do I really need EIN’’ and you are working as a freelancer the answer is - only if you want to. It is not mandatory for you to have it if you are a freelancer. Many freelancers are simply comfortable with using their social security number. Yet it is also becoming a business practice for businesses to ask for EIN and if you want to consider getting your EIN, we will also mention some benefits that can help you make up your mind.
According to the IRS website, you are obligated to obtain an Employer Identification Number if you are involved in the following types of organizations: trusts, farmers cooperatives, real estate investments… but these are often not connected with the world of freelancers which mostly revolves around IT technologies.
Let’s breakdown the pros of EIN when freelancing:
We have established that it is up to you if you want to get your EIN when freelancing. It is not mandatory and if you are still not comfortable with using it, it is completely fine. But as your business grows you might consider getting one.
Getting an EIN can help you establish better credibility and look more professional to your prospective clients. It is not a time-consuming process but it can benefit your business and help you gain even better traction for your business.
Also, remember to avoid getting third parties involved if you decide to get an EIN. Don’t fall for the various scams!
Many freelancers are comfortable with using their Social Security Number as their tax ID “Request for Taxpayer Identification Number and Certification,” which provides your employer with enough information. After getting this information, your client or employer can send you a 1099 form which is used for reporting your income to the Internal Revenue Service (IRS).
By IRS, freelancers are considered to be self-employed. So it means you need to file your taxes as a business owner. Yet you need to be extra careful not to face additional taxes or fees and make sure to inform about deductibles if you are self-employed.