Benefits of a Tax ID Number

by Wilhelm Schnotz
Tax identification numbers aid in more than tax preparation.

Tax identification numbers aid in more than tax preparation.

Your Social Security number doubles as your tax identification number when you file federal taxes. For most taxpayers, using a Social Security number to pull double duty with the Internal Revenue Service is all that’s necessary. For a handful of others, though, other tax identification numbers such as employer identification numbers and individual taxpayer identification numbers provide distinct advantages.

Facilitate Taxation

Although sole proprietors can operate a business organized under the umbrella of their Social Security number, once they start hiring employees, it’s mandatory to receive an employer identification number. The IRS requires all employers who collect payroll taxes to do so using an EIN rather than a Social Security number. Similarly, foreign workers aren’t eligible for Social Security benefits, and must obtain a ITIN to file their individual income taxes. In this respect, having these identifying numbers isn’t a benefit, but a requirement.

Banking and Credit

Entrepreneurs who wish to establish a banking history for their company that’s separate from their own finances -- an important concern if you plan to sell the company or want to shield yourself from liability by moving beyond an sole proprietorship -- must use a EIN to do so. As EINs function as unique identifiers for companies similar to your Social Security number, you’ll need one to open a corporate bank account and establish a company credit history that’s separate from your own.

Keogh Plans

Even if you don’t have any employees, using an EIN to identify your company can open doors to retirement plans that aren’t available if you use your Social Security number. Keogh plans allow self-employed taxpayers to contribute up to 25 percent of income, or $50,000 under a defined-benefit model to a tax-deferred retirement account. Keogh plans may also be used to structure a self-funded pension plan similar to defined-benefit plans used by traditional employees.

Identity Security

If you’re an independent contractor with several clients, you may feel a little uneasy about handing your Social Security number out to every company that must submit a Form 1099 before it pays you. An EIN may be used in lieu of a Social Security number, protecting your personal identity -- as well as bank accounts, credit history and taxes -- from falling into criminals’ hands. Even if you trust your clients completely, their files may be compromised or stolen, exposing your personal information to the underworld.

About the Author

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.

Photo Credits

  • Duncan Smith/Photodisc/Getty Images