An Employer Identification Number, (EIN, sometimes called Federal Tax ID Number) is a nine-digit number assigned by the IRS. EINs are used by employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates of decedents, government agencies, certain individuals, and other business entities.
You are required to obtain an EIN if you do one or more of the following:
1. Form a C or S corporation or partnership (in this case the EIN serves essentially the same purpose that a social security number does for a sole proprietorship) 2. Pay wages to one or more employees or File pension or excise tax returns
A sole proprietorship with no employees, pension plans, or excise taxes does not need an EIN. A sole proprietor can use the social security number for income tax, self-employment, and other tax purposes.
For more detailed information on how to determine whether you should obtain an EIN, refer to the IRS publication Understanding Your EIN. To obtain an EIN you must complete IRS Form SS-4. Banks require an EIN to open a corporate or partnership bank account.
Payroll Taxes and Withholding Taxes
Employers are responsible for withholding taxes from employees’ paychecks, sending them to the proper government agencies, and other employer tax obligations. The major employer paid taxes (FICA, federal unemployment, and state unemployment taxes) will be explained later in this section.
Social Security and Medicare Taxes
The Federal Insurance Contributions Act (FICA) provides for a federal system of old-age, survivors, disability, and hospital insurance. The first three are financed by the social security tax, while hospital insurance is financed by the Medicare tax. To learn more about the five major benefits covered by Social Security taxes (retirement, disability, family benefits, survivors and Medicare), please refer to the Social Security Administration’s Web site.
Employers must withhold social security and Medicare taxes from employees’ wages and pay a matching amount. These taxes have different rates and only the social security tax has a wage base limit. There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.
Federal Unemployment Tax
The Federal Unemployment Tax Act (FUTA), together with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it is not deducted from the employee’s wages. Generally, employers can take a credit against FUTA tax for amounts paid into state unemployment funds. This credit cannot be more than 5.4% of taxable wages. Those entitled to the maximum 5.4% credit have an effective FUTA tax rate of 0.8% after the credit. The IRS has tests to determine whether a particular business must pay FUTA tax.