What Is Tax Registration and How Does It Work?

Tax registration is the process of notifying a government tax agency, like the Internal Revenue Service (IRS) or a state’s department of revenue, of a business’s existence and its obligation to pay specific taxes. This is a legal requirement for most businesses and a foundational step for tax compliance. The process establishes a formal record and a unique identifier for the business, which is used in all future tax filings. Failing to register can lead to significant penalties and legal complications, while proper registration ensures a business can legally hire employees, sell goods, and file required tax returns.

Common Types of Tax Registrations

Federal Registration

The most common federal tax registration for a business is obtaining an Employer Identification Number (EIN). An EIN is a unique nine-digit number issued by the IRS to identify a business entity for tax purposes, often called a Federal Tax Identification Number. Corporations, partnerships, and limited liability companies (LLCs) are required to obtain an EIN, as are sole proprietorships that pay employees or file excise tax returns.

An EIN is necessary to hire employees, open a business bank account, and apply for business licenses. Some sole proprietors choose to obtain an EIN to avoid using their personal Social Security Number for business transactions, which helps protect against identity theft. A business should only have one EIN, and a new one is needed if the ownership or structure of the business changes.

State Registrations

Businesses often need to complete several tax registrations at the state level. A sales tax permit, sometimes called a seller’s permit, is required for businesses that sell tangible goods or certain taxable services, authorizing the collection of sales tax from customers.

For businesses with employees, two other registrations are common. The first is for state income tax withholding, which requires employers to register with the state’s revenue agency to withhold employee wages for income tax. The second is for State Unemployment Tax Act (SUTA) taxes, which funds unemployment benefits for former workers.

Local Registrations

Beyond federal and state requirements, businesses may also need to register with local governments like cities or counties, often tied to obtaining a general business license. Local jurisdictions may impose their own specific taxes that require separate registration. These can include city-level income taxes, property taxes on business-owned real estate, or other specialized local taxes. Business owners should check with their city or county clerk’s office to understand the full scope of their local tax obligations.

Information and Documentation Needed to Register

Before beginning the tax registration process, a business owner must gather specific information and documentation to ensure a smooth and accurate application. Key details needed include:

• The legal name of the business, which must match state registration records
• The “Doing Business As” (DBA) or trade name, if different from the legal name
• The business’s physical and mailing addresses
• The full name and Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) of the responsible party
• The business entity type, such as a sole proprietorship or S-Corp
• The date the business started or was acquired
• The number of employees expected in the next 12 months
• A clear description of the principal business activity

NAICS Code

Many tax registrations require a North American Industry Classification System (NAICS) code. This standard helps government agencies categorize the business based on its primary activities. Business owners can find their NAICS code by visiting the U.S. Census Bureau’s website, which has a searchable database. By entering keywords that describe their business, they can identify the most appropriate six-digit code, which is often a required field on tax registration forms.

Key Form Example (Form SS-4)

The application for a federal EIN is completed using Form SS-4, Application for Employer Identification Number. This form can be downloaded from the IRS website and uses the information gathered previously. In addition to basic business details, the form asks for the reason for applying, the business start date, and the closing month of the accounting year. Once completed, this form serves as the official application for the business’s federal tax identity.

How to Complete the Registration Process

Federal (EIN)

The fastest method to obtain an EIN is through the IRS’s online application portal, which provides the number immediately upon completion. For those who prefer not to use the online system, the completed Form SS-4 can be submitted by fax or mail. If faxing, the IRS sends back the EIN in about one week, while mailing the form is the slowest method, with a processing time of approximately four weeks.

State and Local

The process for state and local tax registration varies by jurisdiction but often mirrors the federal process. Most states have an online portal on their Department of Revenue or Secretary of State website where businesses can register for sales, withholding, and unemployment taxes. Applicants should look for links such as “New Business Registration” on these government websites. While some jurisdictions may still offer paper forms, online submission is the most efficient method.

Post-Submission

After submitting a registration application online, the business will receive an electronic confirmation. For online EIN applications, the nine-digit number is provided instantly, while state and local account numbers may be issued within a few business days. Following this, official documentation is sent by mail. This can include a confirmation letter from the IRS (CP 575) for an EIN, a physical sales tax permit, and notices detailing the assigned tax filing frequency. These documents are important records that should be stored securely.

Key Responsibilities After Registering

Maintain Records

Once tax registration is complete, the business must maintain secure and organized records. This includes safely storing the EIN confirmation letter, state tax permits, and any other registration documents received from tax agencies. Proper record-keeping extends to all financial transactions of the business, including detailed records of income, expenses, and any taxes collected from customers. These records are the foundation for accurately preparing and filing tax returns.

Understand Filing Requirements

Registration triggers a legal obligation to file tax returns. Tax agencies will inform the business of its filing frequency, which could be monthly, quarterly, or annually, depending on the tax type and volume of business. A business must file a return for each period, even if no tax was collected or is owed; this is often referred to as a “zero return.” Failure to file on time, even a zero return, can result in penalties. Understanding the specific due dates for each required tax return is a key part of compliance.

Make Timely Payments

Along with filing returns, a business is responsible for remitting any taxes owed by the specified deadlines. For taxes like sales tax and payroll withholding, the business acts as a collector for the government, holding the funds in trust until they are due. Payments must be made in the manner prescribed by the tax agency, which is increasingly through electronic funds transfer. Late payments can result in substantial penalties and interest charges, so establishing a system to track payment due dates is an important step.

Update Information

A business has an ongoing responsibility to keep its registration information current with all relevant tax agencies. If there are significant changes to the business, such as a change in mailing address, physical location, or ownership, the tax authorities must be notified. This ensures that important notices are received and that the business’s accounts are accurate. The process for updating information can often be done through the same online portals used for initial registration, and failing to do so can lead to missed communications and potential penalties.