EIN for Freelancers and Sole Proprietors: Is It Necessary?

The gig economy is booming, with a projected 42 million self-employed individuals in the US by 2026.

With the growing number of freelancers and sole proprietors, the importance of EINs becomes more evident as they seek to professionalize their businesses and protect their personal information.

While an EIN is commonly associated with larger businesses, there are several scenarios where obtaining one can be beneficial or even necessary for freelancers and sole proprietors. 

This blog will explore the importance of an EIN, when it is required, and how it can benefit your business.

What is an EIN?

An Employer Identification Number (EIN), or Federal Tax Identification Number, is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to businesses operating in the United States. 

It is primarily used for tax purposes, similar to how Social Security Numbers are used for individuals. 

Your EIN helps the IRS identify businesses for tax reporting and compliance.

Is an EIN Necessary for Freelancers and Sole Proprietors?

Freelancers and sole proprietors are not required to have an EIN if they do not have employees. Instead, they can use their Social Security Number (SSN) for tax reporting.

However, there are several situations where having an EIN becomes necessary or highly beneficial.

1. Legal Mandate for Hiring Employees

An EIN becomes essential if you expand your business and hire a team. You are legally required to obtain an EIN for reporting employment taxes, such as payroll taxes and Social Security withholdings.

This ensures you comply with IRS regulations when maintaining a team.

2. Business Bank Account for Streamlined Finances

Many banks require an EIN to open a business bank account.

Separating your personal and business finances is crucial for accurate bookkeeping and tax reporting.

3. Filing Excise Taxes

 If your business is subject to excise taxes, such as those related to alcohol, tobacco, firearms, or specific environmental taxes, an EIN is mandatory.

4. Establishing a Retirement Plan

If you establish a retirement plan like a Solo 401(k) or SEP IRA, you will need an EIN.

5. Applying for Business Licenses and Permits

Some local governments require an EIN to issue business licenses or permits.

6. Forming an LLC or Corporation

Obtaining an EIN is a necessary first step if you decide to build an LLC or corporation.

Benefits of Having an EIN as a Solopreneur

Even if you are not required to have an EIN, there are several benefits to obtaining one as a freelancer or sole proprietor:

✅ Tax Optimization 

EIN makes tax reporting simple. It helps keep your personal assets and business finances separate, making it easier to track expenses and income for tax purposes.

For freelancers starting as solopreneurs and forming LLCs at a later stage, an EIN makes the business eligible for certain tax deductions. Additionally, there are certain tax benefits such as passing through income, losses, and credits directly to the owners. 

This can reduce the overall tax burden for the business and its owner.

✅ Strong Business Legitimacy

An EIN goes beyond tax ID for freelancers. It’s a strategic tool that:

1. Boosts Legitimacy

It shows the IRS you’re a real business, potentially reducing audit risks (especially for deductions like home office expenses).

2. Attracts Clients & Clarifies Status

Clients often prefer contractors with an EIN, which simplifies their tax reports and confirms the “independent contractor” status.

✅ Business Identity Protection

Using an EIN instead of your SSN reduces identity theft risk by protecting your personal information.

Let’s consider two scenarios:

Scenario 1:

Identity thieves stealing taxpayers’ SSNs to file fraudulent tax returns is becoming increasingly common. 

It gets worse. They even receive tax refunds. 

It is, therefore, wise to keep your SSN as private as possible.

Scenario 2:

As an independent contractor, your clients can withhold 24% of your payments if you fail to provide your EIN or SSN.

With an EIN,  you can avoid sharing your Social Security number with clients and others, protecting your personal information.

This also ensures you receive your full income promptly, avoiding unnecessary delays and administrative complications.

✅ Business Growth

As your business grows and your vision takes root, having an EIN becomes a strategic advantage.

For instance:

1.You need an EIN to recruit employees and set up a payroll system. And also when you issue employee tax forms in the future.

2. Certain banks might accept your SSN for a business account. An EIN, on the other hand, allows you to choose from a wider selection of banks. 

An EIN is your “VIP access” to select a bank that fits your needs.

3. An EIN is a prerequisite for establishing business credit. By facilitating access to business credit cards and loans, an EIN empowers you to build a strong credit history through consistent on-time payments. 

This boosts your overall business credit profile.

✅ Expand Your Horizons as a Non-US Entrepreneur

As a non-US entrepreneur, an EIN is your key to starting a business without a US Social Security number or Individual Taxpayer Identification Number (ITIN).

With an EIN, you can open a business bank account and handle other essential tasks that typically require a personal tax ID. 

Applying for an EIN over the phone is a simple process for entrepreneurs outside the US.

How to Obtain an EIN

Obtaining an EIN is a straightforward process that can be done online through the IRS website.

Here are the steps to apply for an EIN:

Step 1: Determine Eligibility

Ensure that you meet the eligibility criteria. You must have a valid SSN or Individual Taxpayer Identification Number (ITIN).

Step 2: Complete the Application

The IRS provides an online application form (Form SS-4) that you can complete.

The form requires basic information about your business, such as the name, address, and entity type.

Step 3: Submit the Application

Once you have completed the application, you can submit it online. You will receive your EIN immediately upon completion.

For freelancers and sole proprietors who prefer assistance with the process, doola offers an EIN registration service that simplifies and streamlines the application process.

With doola’s expertise, you can ensure your EIN application is completed accurately and efficiently. 

You can learn more about doola’s EIN services right away.

Next Step: Level Up with an LLC – doola Can Help

Obtaining an EIN is a fantastic first step, but why stop there? 

Your business has great potential, and it’s time to scale new heights.

Fortifying your business with an LLC adds a layer of protection and unlocks new growth opportunities.

An LLC shields your personal assets from business liabilities and opens doors for potential investors and partners.

doola offers comprehensive LLC formation services that guide you through the entire process, from selecting a business name to filing the necessary paperwork with the state. 

Forming an LLC with doola can help you establish a solid legal foundation for your business, allowing you to focus on what you do best—creating and growing your brand.

Transform Your Business with doola’s EIN and LLC Services

doola has empowered business owners from over 175 countries to build their dream companies in the US.

If you’re all set to get your business venture off the ground, doola has everything you need. 

From choosing a company name to obtaining an EIN and finalizing paperwork, doola’s team of experts helps you navigate the business and administrative maze.

With doola’s EIN registration and LLC formation services, you can protect your personal assets and provide a robust structure for your business. 

We are here to handle the legal essentials while you build your business empire.

Ready to dream big? 

Contact doola today, and let’s get you started.

FAQs

Do I absolutely need an EIN as a freelancer or sole proprietor?

It is not mandatory. You can usually use your Social Security Number (SSN) for tax reporting purposes if you have no employees.

However, an EIN offers several advantages that benefit most freelancers in the long haul.  

How much does it cost to get an EIN?

Obtaining an EIN is entirely free through the IRS. You can apply online, by mail, fax, or phone.

Team doola also offers an EIN registration service for a fee, simplifying the process for solopreneurs.

Is it difficult to apply for an EIN?

Applying for an EIN is a simple process. You can complete the application (Form SS-4) online and receive your EIN immediately.

doola’s EIN services ensure your application is accurate and submitted correctly.

What if I have an EIN but never use it? Will it impact my taxes or finances?

Having an EIN you never use typically does not impact your taxes or finances.

However, you should inform the IRS if you decide to close your business to avoid any complications in the future.

Can I create a business bank account without an EIN?

Most banks require an EIN to open a business bank account.

However, sole proprietors who use their SSNs might find some banks willing to accommodate them. Although it’s less common.

Is it okay to use my SSN instead of an EIN?

You can use your Social Security number instead of an EIN, but using an EIN offers better protection against identity theft.

With an EIN, you no longer need to share your Social Security number with clients or vendors for tax purposes.

Why does my LLC not have an EIN?

There could be two reasons:

1. Never Applied:

LLCs don’t automatically receive EINs upon formation. You need to apply for one with the IRS.

2. Not Mandatory:

EINs aren’t required for all LLCs. Only those with employees or filing specific tax returns need one.