Federal Tax ID Number -
Your Employer Identification Number (EIN) is your federal tax ID and you need it to:
- Pay federal taxes
- Hire employees
- Open a bank account
- Apply for business licenses and permits
It's free to apply for an EIN, and you should do it right after you register your business. Your business needs a federal tax ID number if it does any of the following:
- Pays employees
- Operates as a corporation of partnership
- Files tax returns for employment, excise, or alcohol, tobacco, and firearms
- Withholds taxes on income, other than wages, paid to a non-resident alien
Changing Your EIN -
If you already have an EIN, you might have to change or replace it with a new one if certain changes have occurred with your business, such as:
- Name change
- Address change
- Changes in ownership
- Changes in management
- Change in tax status
Your requirements will depend on your business structure and the kind of change that occurred. Check with the IRS to determine exactly whether you need to change or replace your EIN.
State Tax ID Number -
The need for a state tax ID number ties directly to whether your business must pay state taxes. Sometimes, you can use state tax ID numbers for other functions, like protection against identity theft for sole proprietors. The process to get a state tax ID number is similar to getting a federal tax ID number, but it will vary by state.
It is important to research and understand your state's laws regarding income taxes and employment taxes, the two most common forms of state taxes for small businesses. Seven states have no income tax, and another two only impose tax on income from dividends. States that do tax income will determine figures based on business structure.
Taxes also vary by state on employment insurance and workers’ compensation insurance. Understand these and other implications in calculating startup costs and choosing a business structure.