Tax ID vs EIN: Which One Do You Need for Your Business?

What is a Tax ID (TIN)?

A Tax Identification Number (TIN) is an umbrella term that includes several types of identification numbers issued by the IRS for tax reporting purposes. It is issued either by the Internal Revenue Service (IRS) or the Social Security Administration (SSA), depending on the type of TIN.

There are three broad categories of TIN, depending on the nature of the entity or individual reporting tax information:

• SSN (Social Security Number): Used primarily by individuals, especially employees, for tax and employment purposes
• ITIN (Individual Taxpayer Identification Number): Issued to individuals who cannot obtain an SSN, often used by non-resident aliens and others who must pay US taxes but aren’t eligible for an SSN
• EIN (Employer Identification Number): Primarily for businesses, non-profits, and certain other entities to handle their tax and payroll responsibilities

Individuals use a TIN for filing personal taxes, while businesses and other organizations may use different types of TINs like an EIN (Employer Identification Number) or ITIN (Individual Taxpayer Identification Number) to meet specific tax requirements.

A TIN consists of nine digits, formatted as follows:

XXX-XX-XXXX (for individuals)

or

XX-XXXXXXX (for entities like businesses)

Who needs a TIN?

Any individual or entity that is required to file US federal taxes or that conducts business in the US needs a TIN. This includes:

• US citizens and residents filing personal income taxes
• Non-US citizens who need to file taxes (via an Individual Tax Identification Number (ITIN)
• Businesses and entities that are required to report income, pay payroll taxes, or perform financial transactions subject to IRS oversight

There is one TIN per individual or entity, and it is used to ensure that the IRS can accurately track taxes paid and owed.

Why is a TIN important for HR and payroll?

A TIN plays an essential role in HR and payroll functions. Businesses use their TIN to comply with federal and state tax regulations, including the reporting of employee wages and the withholding of income taxes. Additionally, TINs are required for issuing essential documents such as W-2s, which detail wages and taxes withheld for employees.

HR departments also use TINs to process employee benefits, such as health insurance and retirement plans, ensuring the correct contributions are made to both employees and the IRS. In summary, a TIN is critical for maintaining tax compliance, facilitating accurate reporting, and ensuring smooth HR and payroll operations.

What is an EIN?

An Employer Identification Number (EIN) is a specific type of TIN used by businesses and other organizations to identify themselves for tax purposes. It is issued by the IRS and is required for corporations, partnerships, and entities with employees.

Here is the format of an EIN, which consists of nine digits:

XX-XXXXXXX

A letter identifier (i.e. P) or plan number (i.e. 003) might follow the EIN number for employee plans.

Who needs an EIN?

Any business with employees or a structure that requires tax filing beyond personal income taxes (e.g., corporations, partnerships, estates, trusts, and non-profits) needs an EIN.

There is only one EIN for each business entity. They are not assigned per employee.

Business entities requiring an EIN include corporations, non-profits, partnerships, and sole proprietorships (including independent contractors). Estates and trusts, set up to manage the financial interests of third parties, also require an EIN.

The following entities are exempt from tax and therefore do not require an EIN:

• Churches or similar religious bodies are granted tax-exempt status
• Private foundations that have been granted tax-exempt status
• Charitable bodies are exempted under Internal Revenue Code Section 501(c)(3)

Why is an EIN important for HR and payroll?

EINs are vital for several mandatory reporting functions, and when applying for certain business licenses. Situations where they become vital include:

• Reporting employee wages: Employers use EINs when reporting payroll taxes to the IRS and state tax agencies
• Filing federal and state taxes: EINs are necessary for filing business income taxes and employee-related tax documents like W-2s
• Applying for business licenses: Many states and local jurisdictions require a valid EIN to issue business permits and licenses

An Employer Identification Number (EIN) is crucial for HR and payroll professionals because it serves as a unique identifier for businesses when managing employee-related tax obligations.

It’s required for filing essential payroll forms such as W-2s, W-3s, and 941 forms, which report employee wages and payroll taxes to the IRS. Without an EIN, businesses cannot legally withhold or remit payroll taxes, potentially leading to penalties or compliance issues.

Additionally, EINs are necessary for processing employee benefits, such as retirement plans and health insurance, as many providers use the EIN to track contributions and ensure regulatory compliance.

HR departments also rely on EINs when hiring new employees or applying for unemployment insurance on behalf of their workforce. Overall, EINs ensure smooth tax reporting, legal compliance, and accurate tracking of all business-related employee activities, making them indispensable for payroll and HR operations.

Key differences between Tax ID and EIN

The distinction between TIN and EIN lies in their usage and who needs them. Let’s contrast the purpose and use of both identifiers, and the individuals and entities that use them.

When payroll and HR need to know the difference

There are three main reasons why HR departments need to know the difference between these numbers, their purpose and function:

Hiring employees

Employers must ensure the correct documentation is used for each employee, including obtaining the employee's Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) for individuals who are not eligible for an SSN.

This is essential for payroll processing, tax reporting, and verifying employment eligibility through the I-9 form. Additionally, businesses must be properly registered with an EIN to ensure compliance with federal and state regulations.

Without an EIN, employers cannot legally withhold taxes, report wages, or make contributions to employee benefits, risking significant legal and financial consequences.

Tax reporting and filing

EINs are essential for businesses when filing payroll taxes at both the federal and state levels.

Employers use their EIN to submit quarterly and annual payroll tax forms, including the IRS 941 and 940 forms, which report employee wages and tax liabilities. Additionally, EINs are used to issue W-2 forms to employees, detailing the total wages earned and taxes withheld throughout the year.

Failure to file accurate and timely tax reports can result in penalties, audits, and compliance issues, making the proper use of EINs and other TINs critical to a business's financial health.

Managing contractors

Businesses must handle contractor payments carefully, ensuring that the correct TINs or EINs are used for filing 1099 forms with the IRS.

A Form 1099-NEC is used to report non-employee compensation for independent contractors. Failure to correctly report payments to contractors can lead to tax errors, penalties, and complications for both the business and the contractor.

Properly managing contractor payments with the correct identification numbers also ensures the company complies with tax laws and avoids misclassifying employees as contractors, a mistake that can result in legal action or fines.

Steps to obtain a Tax ID and EIN

Here’s a step-by-step breakdown of how to obtain these numbers. It’s important to gather all the necessary information and avoid making mistakes that can delay the application process.

How to apply for an EIN

Obtaining an EIN is a straightforward process, but it requires specific information about your business. Here’s a step-by-step guide to applying for an EIN:

1. Determine eligibility

Ensure that your business is required to have an EIN. Typically, any business with employees, corporations, partnerships, or entities involved in filing taxes separate from personal income taxes must obtain an EIN.

2. Gather required information

Before applying, gather the necessary details about your business, including:

• The legal name of the business
• The structure of the business (corporation, partnership, sole proprietorship, etc.)
• The principal officer’s name and Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
• The physical location of the business
• The primary activity of the business and the date it was started

3. Choose your application method

You can apply for an EIN through one of the following methods:

• Online: The fastest and most popular method is to apply online through the IRS website. This option provides instant confirmation of your EIN
• By Mail: If you prefer, you can complete Form SS-4 and mail it to the IRS. The processing time is typically four weeks
• By Fax: You can also fax Form SS-4 to the IRS, and they will fax your EIN back within four business days

4. Complete the Form SS-4

Fill out Form SS-4 with all the relevant information. Ensure accuracy to avoid delays. The form requires details about the business owner, the legal name of the business, the reason for applying for an EIN, and the type of business entity.

5. Receive and use your EIN

Once the IRS processes your application, you will receive your EIN either instantly (online) or via mail or fax. After receiving your EIN, you can use it for various tax reporting purposes, including payroll, opening business bank accounts, and filing business tax returns.

When and how to apply for an ITIN or SSN

Individuals who need a Taxpayer Identification Number (TIN) may need either an SSN or an ITIN, depending on their eligibility. Here's how and when to apply:

1. Determine which identification number you need:

• SSN (Social Security Number): US citizens and eligible non-citizens (such as lawful permanent residents) can apply for an SSN through the Social Security Administration (SSA). This number is essential for filing taxes, receiving social security benefits, and employment purposes
• ITIN (Individual Taxpayer Identification Number): Non-citizens who are not eligible for an SSN but still need to file taxes, such as non-resident aliens, can apply for an ITIN. This is mainly used for tax reporting purposes and does not grant eligibility to work in the US

2. Gather required documents for an SSN application

If you are a US citizen or eligible resident, apply for an SSN by providing:

• Proof of identity (such as a US passport or state-issued ID)
• Proof of US citizenship or immigration status (such as a birth certificate or immigration documents)
• Complete Form SS-5, which is the application for a Social Security Card.

3. Submit your SSN application

Applications can be submitted to the Social Security Administration in person or by mail. Once approved, your SSN card will be mailed to you within two weeks.

4. Apply for an ITIN (If ineligible for an SSN)

Non-US residents who cannot obtain an SSN can apply for an ITIN by completing Form W-7 and submitting it to the IRS. You will need the following:

• A completed Form W-7 (Application for IRS Individual Taxpayer Identification Number)
• Proof of identity (such as a passport)
• A valid reason for requesting an ITIN (for example, filing a US tax return or being claimed as a dependent on someone else’s return)

5. Submit your ITIN application

Submit Form W-7 to the IRS either by mail, through an IRS walk-in office, or by using an authorized Acceptance Agent. The application must be accompanied by original or certified copies of your identity documents. Processing can take up to seven weeks, and the ITIN will be mailed to you upon approval.

6. Use your SSN or ITIN

Once you receive your SSN or ITIN, you can use it for tax reporting, employment purposes (for SSNs), and other IRS-required filings. Keep your identification number secure, as it will be needed for future tax returns and other legal purposes.

Compliance and mistakes to avoid

Because they are formatted very similarly, it can be easy to confuse a business’s EIN with an employee’s personal TIN. Ensure these numbers are stored separately and specified clearly to prevent such confusion.

Avoid using incorrect or out-of-date TINs for payroll tax reporting. This can lead to significant errors in tax filings, and potentially penalties, if reporting deadlines are missed due to an HR or payroll department error.

It’s always worth double-checking these numbers before inputting them, to avoid costly errors downstream.

Failing to provide correct EINs or TINs can result in fines or other legal penalties. Correcting mistakes promptly can help avoid escalating issues with tax authorities. Currently, the failure to file penalty equates to 5% of the monthly unpaid taxes, to a maximum of 25% of total unpaid taxes.

Best practices for payroll and HR professionals

Here are three suggestions for procedural improvement to ensure better tax filing and compliance:

• Proper documentation and record-keeping: Always ensure that employee and contractor tax information is accurately recorded and verified (and ideally separated to avoid TIN / EIN confusion)
• Regular audits: Perform regular payroll audits to make sure TINs and EINs are properly used, and all data is up to date
• Use of payroll software: Technology can streamline the management of EINs, TINs, and employee tax data, reducing errors and improving efficiency

Let Deel help you comply with tax filing complexities

Understanding the differences between TINs and EINs is crucial for payroll and HR professionals to ensure tax compliance and avoid costly mistakes. Employers should use the appropriate ID numbers for employees and businesses, while using technology to maintain compliance.

Learn more about how Deel PEO and Deel US Payroll can help manage your EINs, TINs, and payroll compliance efficiently. Book a demo here.