Most of us are familiar with Social Security numbers. Usually assigned at birth, SSNs are individual, unique numeric identifiers for each US citizen and many non-citizen residents. SSNs together comprise a system for various levels of government to identify each person uniquely, even if those people share names, ages and hometowns.
Similarly, the government needs to identify various businesses and relationships, often because of the tax implications that those entities and relationships present. For instance, certain corporations are directly taxed as if they are people, but most partnerships have tax implications directly imposed upon the individual partners in the partnerships.
Therefore, when a new business is created, it is common to secure the “non-human being” equivalent to an SSN. That non-human being equivalent to an SSN is called a tax identification number or employer identification number, commonly called an EIN. Like SSNs, EINs are unique numbers that are never re-used once assigned.
The IRS requires that most businesses with more than one owner have an EIN. And, the IRS requires almost all businesses that have at least one employee have EINs.
As explained previously in this column, a trust is best thought-of as being a set of rules. The IRS classifies trusts into categories that are different than how most attorneys classify and define trusts. Most trusts that can be changed are considered revocable, and the IRS usually does not require that revocable trusts have EINs.
The IRS requires most probate estates and trusts that are irrevocable (either from inception or due to the death of the only person who can revoke the trust) to have EINs. This is partly because many, but not all, irrevocable trusts, even though they are technically just sets of rules, can be subject to direct taxation, typically at the highest tax rates.
People very often secure EINs even in situations where the IRS does not require EINs. There are three, frequent reasons why someone might secure an EIN even if the IRS does not require it.
First, almost all banks who set up business checking accounts will require that the business’s EIN be used in identifying the account owner in order to clarify the exact legal status of the customer, which defines the banks’ legal requirements.
Second, the risk of identity theft drives many small business owners to avoid regularly using their SSNs. In such instances, it can be convenient to secure and use an EIN instead of an SSN.
Third, anyone enrolled in the federal government’s farm commodity protection programs likely needs EINs for a variety of relationships that would not otherwise require EINs. For instance, under the current Farm Bill, the USDA is required to identify each trust, no matter its informality, and document the trust beneficiaries’ relationships in order to ensure that no program participant exceeds the annual limit on payment amounts.
It is always advisable to hire an attorney to determine if an EIN is needed and assist in the process of getting an EIN.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.