In order to report your business profit or loss to the IRS, you need to use an identification number. The most common ones are the social security number (SSN) and the employer identification number (EIN). A business is required to have an EIN if it has:
- Employees
- A qualified retirement plan
- Operates a business as a corporation or partnership
- Files returns for employment taxes or excise taxes
While a sole proprietor can use their SSN for their business identification, I highly recommend you do not. The less you use your social security number, the less change you have of identity theft. You may obtain an EIN free of charge by going online to www.irs.gov, by calling 800-829-4933 from 7:00 am to 10:00 pm in your local time zone, or by mailing/faxing Form SS-4 which is available on the irs.gov web site.
Payee's Identification Number
When operating a business, you will probably make certain payments you must report on information returns (discussed later). The forms used to report these payments must include the payee's identification number.
Employee. If you have employees, you must get an SSN from each of them. Record the name and SSN of each employee exactly as they are shown on the employee's social security card. If the employee's name is not correct as shown on the card, the employee should request a new card from the Social Security Administration. This may occur, for example, if the employee's name has changed due to marriage or divorce.
If you employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the Social Security Administration (SSA). This form is available at SSA offices or by calling 800-772-1213 or going to www.ssa.gov.
Other Payee. If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN.
To record the payee's SSN or EIN, you need to have them fill out Form W-9, Request for Taxpayer Identification Number and Certification and keep it on file. This form is available from IRS offices, by calling 800-829-3676, or by visiting www.irs.gov.