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EIN vs. SSN: What’s the Difference and Why It Matters

Business owners often navigate many complex obligations like tax filings and employee management. Therefore, it is crucial to understand the difference between an Employer Identification Number (EIN) and a Social Security Number (SSN).
Understanding the distinction between these two numbers allows businesses to maintain compliance with rules and regulations set by governing bodies.
Failure to comply may result in penalties or fines that can significantly impact a company’s financial stability.
In this blog, we’ll demystify EINs and SSNs by breaking down their key differences and highlighting why knowing which one to use—and when—can make all the difference for your business’s success.
So, let’s dive into the essential information every entrepreneur needs!
What Is an EIN and SSN?
EIN and SSN serve the purpose of identifying an individual or business.
They have distinct differences and play different roles in various situations. An EIN is a nine-digit number the Internal Revenue Service (IRS) assigns businesses for tax purposes.
Also known as a Federal Tax Identification Number is used to identify a business entity when filing taxes, opening bank accounts, applying for loans or credit cards, hiring employees, and conducting other financial transactions.
The EIN format follows the pattern of XX-XXXXXXX, with the first two digits representing the location where the business is registered.
This number is unique to each business entity and does not change even if there are changes in ownership or structure.
On the other hand, the Social Security Administration (SSA) issues SSNs to individuals for social security benefits such as retirement, disability, and survivor’s benefits.
An SSN contains nine digits in the format XXX-XX-XXX. It also serves as a personal identifier for tax purposes and helps track an individual’s earnings throughout their lifetime.
Differences Between EIN and SSN
While both numbers serve as identifiers, there are some key differences between them that every business owner should be aware of.
EINs can only be obtained by eligible entities such as corporations, partnerships, LLCs, or sole proprietors registered with the IRS for tax purposes.
In contrast, all U.S. citizens and permanent residents can apply for an SSN regardless of age or employment status.
One major difference between an EIN and an SSN is that while an EIN is assigned only to businesses or entities with employees, an SSN is issued to individuals regardless of their employment status.
Additionally, unlike an EIN, which can be obtained solely for business purposes through the IRS website or by mail/fax application form, an SSN can only be given once at birth or upon citizenship/immigration application.
Another significant difference is that EIN does not impact personal credit scores as it represents a legal entity rather than an individual’s financial history.
On the other hand, one’s SSN is crucial in determining creditworthiness since it is linked to an individual’s credit report and financial activities.
Another important distinction is that EINs can be transferred between businesses if the ownership changes, while SSNs cannot be transferred or reused under any circumstances.
Risks of Using Your SSN for Business Purposes
Using Social Security Numbers (SSNs) for business purposes has long been a common practice, but it comes with certain risks that should not be overlooked.
1. Identity Theft
One of the biggest risks of using your SSN for business purposes is identity theft.
Your SSN contains sensitive personal information, and if it falls into the wrong hands, it can be used to open fraudulent credit accounts or make unauthorized purchases in your name.
2. No Liability Protection
Incorporating a business provides limited liability protection, which separates personal assets from business liabilities. However, this protection may become compromised when using your SSN for business transactions.
If any legal issues arise with the company, personal assets such as savings accounts or properties could be seized due to mixing personal and business finances.
3. Tax Fraud
Using an individual’s SSN instead of an EIN on tax forms increases their vulnerability to tax fraud. Scammers can use stolen SSNs to file false tax returns and claim refunds before the rightful owner files their return, resulting in audits or penalties from tax authorities.
4. Difficulty in Separating Personal and Business Finances
Using an SSN for business transactions can also make separating personal and business finances challenging. This can lead to confusion when tracking expenses or preparing tax returns, resulting in costly mistakes.
Why Businesses Need an EIN
Many entrepreneurs may wonder why they need an EIN when they already have a government-issued Social Security Number (SSN). Unlike an SSN assigned to individuals for personal use, an EIN is designated explicitly for businesses.
Only entities can obtain an EIN, so you must form a legal business entity like a corporation, partnership, LLC, or sole proprietorship. Even if you are self-employed and operate under your name without any employees, an EIN can help separate your personal and business finances.
One of the main reasons why every business needs an EIN is for tax purposes. The IRS requires all employers with employees to have an EIN to file taxes and report wages paid to employees.
Even if you don’t plan on hiring employees in the future but still want to establish your business credit or open a business bank account, most financial institutions will require you to provide them with your EIN.
Furthermore, using your SSN on official documents puts it at risk of being compromised by hackers or other malicious parties. Using an EIN instead of your SSN on these documents reduces the chances of sensitive personal information falling into the wrong hands.
Another vital reason businesses need an EIN is that it allows them to apply for various forms of financing, such as loans or credit cards.
Many lenders and financial institutions will require a business to have an EIN, as it proves the business’s existence and legitimacy.
How to Apply for an EIN
Since obtaining an EIN is essential for any business entity operating in the US, we will guide you through the process and provide important information about the application requirements.
1. Gather All Required Information
Before starting your application process, ensure you have all the necessary information to avoid any delays or errors. The following information will be required:
- Legal name and address of your business
- Type of legal structure (sole proprietorship, partnership, corporation)
- Name and SSN/ITIN of the responsible party (person authorized to receive correspondence from the IRS)\
- Reason for applying (starting new business/closing existing business/hiring employees)
- Date when your fiscal year ends
- Estimated number of employees
- Estimated income tax filing date
2. Choose Your Preferred Method of Application
There are three ways to apply for an EIN: online through the IRS website, via mail or fax using Form SS-4 (Application for Employer Identification Number), or by phone at 1-800-829-4933 between 7 AM and 10 PM local time.
The online application is the quickest and most convenient option, while the phone application can take up to 4-6 weeks.
3. Complete the Application
If applying online, you will be asked a series of questions about your business and must provide accurate information for each question.
If applying via mail or fax, make sure to fill out Form SS-4 completely with all required information and send it to the designated address or fax number provided by the IRS.
5. Receive Your EIN
Once your application is processed and approved, you will receive your EIN immediately if applied online or within 4-6 weeks through mail/fax applications. Keep your EIN secure, as it will be used for all tax-related purposes and opening business accounts.
Remember to keep your EIN safe and use it responsibly when conducting business operations.
Benefits of Having an EIN for Your Business
While it may seem like just another number, having an EIN can bring numerous benefits to your business.
1. Separate Legal Identity
One of the main benefits of obtaining an EIN for your business is that it creates a separate legal identity for your company.
With a separate legal identity, you can also establish credit in the name of your business, making it easier to secure loans and other forms of financing.
2. Simplifies Tax Reporting
Instead of using your social security number (SSN), which is primarily used for personal taxes, you can use your EIN on all tax forms related to your business. This helps avoid confusion and minimizes the risk of errors when filing taxes.
3. Hiring Employees
EIN identifies payroll taxes and employment reports with government agencies such as the IRS and Social Security Administration (SSA).
It also allows you to withhold federal income taxes from employee paychecks.
4. Establishing Retirement Plans
An EIN is necessary to establish retirement plans such as 401(k) or pension plans for yourself and/or your company’s employees.
These plans offer significant tax benefits but require an EIN to be opened.
5. Opening a Business Bank Account
Most banks require businesses to have an EIN to open a business bank account. This helps keep your personal and business finances separate and makes tracking and managing your business’s financial transactions easier.
6. Building Credibility
Having an EIN can help legitimize your business in the eyes of customers, vendors, and potential partners. It shows that your company is registered with the IRS and has a legitimate legal structure, which can boost trust and credibility.
Knowing when and how to use an EIN versus an SSN is vital in running a successful business. It helps maintain accurate records, protects sensitive information, and avoids legal issues.
Therefore, entrepreneurs and business owners must educate themselves on these distinctions to make informed decisions regarding their company’s identification and tax-related matters.
Get Your EIN Without Any Hassle with doola
If you do not have an EIN and need one for your business, obtaining it through traditional methods can be time-consuming and frustrating.
Moreover, you can face unnecessary delays or rejection due to a small error. This is where doola comes in.
At doola, we understand that starting a business requires much time and effort.
Therefore, we have simplified the process of obtaining an EIN to save you any hassle. Our services allow businesses to apply for an EIN within minutes from anywhere worldwide.
All you need to do is fill out our simple application form with basic information about your business, such as name, address, type of entity, and the reason for applying.
Once your application is complete, our team will review it and submit it to the IRS on your behalf.
You will get your EIN via email in no time, ready to use for all business compliance purposes. With doola’s EIN services, you can save time and focus on other essential aspects of your business.
Consult our Certified Private Accountant (CPA) to know how we can help keep your business 100% compliant and tax ready!