What Is a Federal Identification Number (FEIN) and Who Needs One?

Understanding the importance of a Federal Employer Identification Number (FEIN) is crucial for businesses operating within the United States. This unique nine-digit number, assigned by the Internal Revenue Service (IRS), serves as an identifier for business entities when dealing with tax-related matters and official documentation. Obtaining a FEIN is essential for compliance and facilitates financial operations, such as opening bank accounts, applying for licenses, and managing employee payrolls.

Entities Required to Use a FEIN

A FEIN is required for various entities with distinct operational and regulatory needs. Corporations, partnerships, and limited liability companies (LLCs) must have a FEIN to report income, withhold taxes, and fulfill obligations under the Internal Revenue Code. For instance, corporations need a FEIN to file Form 1120, the U.S. Corporation Income Tax Return.

Non-profit organizations, including charities and religious institutions, also require a FEIN to file Form 990, Return of Organization Exempt from Income Tax, and maintain tax-exempt status. Trusts and estates that file Form 1041, U.S. Income Tax Return for Estates and Trusts, must also secure a FEIN.

Sole proprietors may need a FEIN if they hire employees, operate as a corporation or partnership, or are subject to excise taxes. For example, hiring staff requires a FEIN to manage payroll taxes and file returns like Form 941, Employer’s Quarterly Federal Tax Return.

Steps to Acquire a FEIN

To acquire a FEIN, businesses must first determine eligibility. Entities that pay employees, file tax returns, or operate as corporations or partnerships generally need one. State regulations should also be reviewed to ensure compliance.

The IRS offers several methods to apply for a FEIN, with the online application being the fastest, providing immediate issuance. Alternatively, applications can be submitted via fax or mail, which may take up to four weeks. Applicants must use Form SS-4, Application for Employer Identification Number, and ensure all information is accurate to avoid delays.

Once the FEIN is obtained, businesses should update bank accounts, payroll systems, and tax documents to reflect the new identifier. Secure storage of the FEIN is vital for future tax filings and compliance checks.

Using a FEIN for Tax Filing

A FEIN is essential for tax filing, tying all fiscal activities to the business entity. For corporations, it is used on Form 1120 to ensure accurate attribution of income, deductions, and credits. This helps the IRS verify the financial information provided.

The FEIN is also critical for employment taxes. Businesses report wages paid to employees and taxes withheld on Form 941. It is used on Form W-2, Wage and Tax Statement, to identify the employer reporting employee earnings and withholdings, facilitating employee tax filings and ensuring proper contributions to Social Security and Medicare.

Changing Your FEIN After Business Restructure

A business restructure may require a new FEIN, depending on the nature of the changes. Restructuring can involve ownership changes, mergers, or alterations in the business entity type, each with specific implications under the Internal Revenue Code.

For example, a sole proprietorship that incorporates typically needs a new FEIN due to the legal entity change. In a merger, the surviving entity may also require a new FEIN. However, changes such as a business name or location do not necessitate a new FEIN, though the IRS should be notified.

Common Misconceptions

Several misconceptions about FEINs can lead to compliance errors. One common misunderstanding is that only large corporations need a FEIN. In reality, businesses of all sizes, including small partnerships and sole proprietors with employees, may require one depending on tax obligations. For example, a single-member LLC taxed as a corporation must obtain a FEIN for filing corporate tax returns.

Another myth is that a FEIN is solely for federal tax purposes. While its primary function is IRS identification, many state and local agencies require a FEIN for licensing, tax registration, and compliance. Some states mandate a FEIN for sales tax permits or unemployment insurance accounts. Financial institutions also often require a FEIN for opening business bank accounts or applying for loans. Misunderstanding its broader role can hinder a business’s ability to operate efficiently across jurisdictions and financial platforms.