Many sole proprietors and single-member LLCs who don’t have employees use their social security number for their Federal Tax ID number. This is a very risky practice that could open you up to potential fraud and identity theft.
As a sole proprietor or LLC, you have probably received a request from your customers for a completed form W9 so that they can determine if they need to send you a form 1099.
The form asks you to supply the type of business (Sole Proprietor, LLC or Corporation), your business address, and your Federal Tax ID number.
Using your social security number as your Federal Tax ID number on these forms could put you at risk for identity theft.
If you return the form W9 by fax you could potentially be giving your identification to anyone at your customer’s offices who happens to walk past the fax machine.
Emailing the forms can also be problematic.
Usually, the forms are either forwarded (again via email) or printed out and given to whoever is preparing the 1099s for your customer. That can be someone in their internal accounting department, their bookkeeper or CPA, or any other party they’ve engaged for this purpose including third-party preparers.
That means that your name, address, and social security number are now in the hands of pretty much anyone associated with these various businesses.
What IRS Says About EINs
The IRS states that:
- A sole proprietor without employees and who doesn't file any excise or pension plan tax returns doesn't need an EIN (but can get one). In this instance, the sole proprietor uses his or her social security number (instead of an EIN) as the taxpayer identification number. However, at any time the sole proprietor hires an employee or needs to file an excise or pension plan tax return, the sole proprietor will need an EIN for the business and can't use his or her social security number.
- If you have an existing EIN as a sole proprietor and become a sole owner of a Limited Liability Company (LLC) that has employees or needs to file an excise or pension plan tax return, you need to get a separate EIN for the LLC to file employment taxes.
This means that as a sole proprietor you are eligible to obtain an IRS-issued tax ID number for your business. It’s easy and if you do it online, fast. You can apply online with the IRS and receive your Federal Tax ID (EIN) number at the end of the process.
You can also download form SS4 from the IRS website and complete and mail the request for EIN form if you prefer.
When completing forms W9 in the future you will give your customers your Federal Tax ID number rather than your social security number.
This accomplishes a couple of important goals:
- You are no longer giving out your social security number, thereby helping to protect yourself and your company from identity theft and fraud.
- Using a Federal Tax ID number on forms W9 also helps to show that your company is an established business, making it more attractive to new customers.
When your tax preparer does your tax return they will simply include both your social security number and your Federal Tax ID number on your Schedule C.
Protecting yourself and your company from fraud is essential in today’s economy. This is a simple step you can take to help accomplish that goal.