Why independent contractors should consider an EIN
May 19, 2021
May 19, 2021
An Employer Identification Number (EIN) is a nine-digit number assigned by the IRS that’s used to identify a business entity. You may also hear it referred to as a Taxpayer Identification Number or Tax Identification Number (TIN).
Yes, independent contractors can get an EIN, but it’s not required. According to the IRS, independent contractors are considered self-employed and are a type of sole proprietorship. Some sole proprietorships (like those with employees, for example) must get an EIN. For independent contractors, however, it’s optional.
There are a few key benefits to getting an EIN.
As an independent contractor, you are frequently enabling payment by sharing out information that connects you to the work you do for your multiple clients. While many contractors use their social security number for this, doing so makes key personal information vulnerable in the event that a client experiences a data breach.
Getting an EIN allows you to provide clients with a number that’s linked to your business finances instead of your personal finances. In the event that your data gets stolen, thieves won’t have access to your social security number.
Some clients, especially enterprise companies, require proof that you operate as a business in order to assign you work. Using an EIN is a fast, free, and easy way to help meet that standard. An EIN reinforces that you view yourself as an independent contractor and sole proprietor, demonstrating that you take your work seriously and adds credibility.
According to the Small Business Administration, an EIN is required to establish business credit. Business credit is very similar to personal credit. Like personal credit reports, business credit reports take several factors into account to determine how financially responsible your business is. Much like your personal credit score, business credit scores are used when evaluating loan and credit card applications. In general, the better your business credit score is, the lower your interest rates will be.
Business bank accounts are useful for several reasons. First off, they’re an easy way to keep your personal finances separate from your business finances. Keeping your personal and business transactions separate makes it much easier to complete your taxes at the end of the year. Additionally, it makes all of your finances much clearer in the case you’re audited by the IRS. To be clear, business bank accounts are not required for sole proprietors. Nonetheless, most sole proprietors would agree that business and personal finances should be kept separate.
For sole proprietors, an EIN is not always required to open a business bank account. However, this depends on each bank’s policy. Bank of America, for example, requires an EIN to open a business account. If you’re interested in opening a business checking or savings account, it’s best to contact your prospective bank to find out if an EIN is required.
Many independent contractors realized how useful an EIN could be when the Paycheck Protection Program rolled out during the Covid-19 pandemic. As mentioned above, many banks require an EIN to open a business checking account. Without a business bank account, many independent contractors struggled to prove they were business owners because their personal finances were not separate from their business finances.
This is true for other business loans, too. Additionally, many banks use business credit to assess loan applications, and you need an EIN to build business credit.
In the US, independent contractors have tax-deferred retirement savings options similar to employees participating in company plans. Two of the most common savings plans are individual 401(K)s and SEP-IRAs.
Individual 401(K)s offer many of the same benefits of a traditional 401(K) and allow self-employed workers to contribute up to $64,500 annually. In order to set up an individual 401(K), you must have an EIN. A SEP-IRA allows independent contractors to contribute up to 25% or $57,000– whichever is less, annually. Although you don’t legally need an EIN to open an SEP-IRA, most institutions will require one.
Even if you’re an independent contractor now, your business may grow in the future. If you want to hire employees, you’ll need an EIN. If you want to change your business into a partnership or even a corporation, you’ll need an EIN. If you want to open an individual 401(K) or SEP-IRA as mentioned above, you’ll need an EIN.
All in all, there are tons of reasons to get an EIN, and not many reasons not to get one. Getting an EIN is completely free through the IRS and only takes a few minutes. There are no penalties for not using an EIN. If you’re a Field Nation technician and you do choose to get an EIN, don’t forget to update your tax information.
Field Nation does not provide legal or tax advice and cannot guarantee you will be assigned additional work. Please note that you are not required to have an EIN to continue doing work on Field Nation.
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Bobby joined Field Nation as a contract technician in 2010 and has enjoyed the flexibility and variety of work opportunities ever since. “I like the freedom to build my own schedule on Field Nation. I can work above and beyond my normal shift to enhance my family’s life.”Blog