The IRS recently announced a change in the application process for the employee identification number (EIN). There is only one change, and it is no big deal. Beginning on May 13 (2019), the responsible party tasked with obtaining an EIN for a new enterprise must already have a verifiable tax identification number.
According to the IRS, the change is necessary in order to increase security and transparency. It is not clear how the change accomplishes this goal, but that is the goal, nonetheless. It should not be a problem for most EIN applicants. Any problems that do arise will likely be limited to entities attempting to use current EINs to obtain new ones.
Practical Implementation of the Rule
As previously explained, the rule goes into force on May 13 of this year (2019). For practical purposes, no further EINs will be issued by the IRS without verifiable tax numbers provided by responsible parties. The IRS defines a responsible party as the individual who exercises ultimate control over the organization for which the application is being made.
A good example would be a sole proprietor who now needs to obtain an EIN before he or she can hire workers. As the company owner, he/she is the responsible party. But what about a nonprofit organization that does not have an owner?
In such a case, the responsible party might be the organization's chief executive. It might be the chief financial officer. It's really up to the organization to decide who ultimately exercises primary control over the organization and/or its finances.
Applying for an EIN
Making application for an EIN has not changed as a result of the altered rule. Domestic applicants can file in one of three ways: by using an online form, calling an IRS-provided phone number, or completing paper form SS-4 and mailing it in. The online and phone methods are preferred because they allow for instantaneous issuance. Overseas entities can only apply by phone.
As for verifiable tax numbers, there are two options. The typical applicant will use his or her Social Security number to apply. In the absence of a Social Security number, the responsible party must use the individual tax identification number (ITIN) provided by the IRS.
Most applicants will not even have an ITIN, explains payroll and benefits administration provider BenefitMall. The ITIN is a special number issued for taxpaying purposes by the IRS. It is issued only to those individuals who meet certain qualifications and either do not have, or are not eligible to get, a Social Security number.
Apply before You Hire
While the change to the EIN application process is no big deal, BenefitMall reminds companies on the verge of hiring to make an application before they hire. Why? Because employers need a valid EIN in order to begin withholding and paying employment taxes.
The EIN is required on all tax forms. It is also required to open a business bank account for any entity other than a sole proprietor. So if a small business is getting ready to hire and must therefore establish a new bank account for payroll and tax purposes, opening a new account will require an EIN.
The long and short of it is that applying for and obtaining an EIN before you begin the hiring process makes life a lot easier. You could technically hire and then worry about the EIN application later on, but that is an open invitation to complications.
Yes, the EIN application process has changed slightly. But it's no big deal. As long as you have a tax identification number, you're good to go.