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Penny Taxwise – FEINs for Home Business: Do You Need One?

Ah, so we meet again, my tax-paying co-conspirators! Penny Taxwise back atcha, and this week, I’m continuing the trend started by last week’s post. The topic du jour? Why, taxes for the self-employed, of course! This time, I want to focus on a question asked by a fellow self-employed Tax Connections member. The member writes:

Do I need a Federal Employer Tax ID Number (FEIN) for my home business?

Great question. Let me tell you a little story that I probably shouldn’t. Long before I became a freelance writer (think college years), I tried my hand at a range of other online ventures. The biggest of which was a stint selling clearance items on eBay. Hey, I’m not too proud to own up to my past!

Anyway, I digress. When I was in the thick of my eBay adventure, I spontaneously got the wild idea that I needed a business license and a FEIN. I applied for and received both, though I don’t know why I did. I was losing more money than I was making, and the entire online escapade only lasted for a few short months. I let the business license expire and walked away from my failed attempt as a (faux) business owner. Even though I had a FEIN, I failed to realize what it actually was. Chalk it up to the sophomoric over-eagerness of my early twenties.

Flash forward to thirty-year-old me, and you’ll see a completely new girl. I’m the proud owner of a one-women biz… and it’s thriving. I find myself revisiting the question of whether to obtain my FEIN – only this time, I plan to do a little homework before I apply.

FEIN – Do You Really Need One?

Another Tax Pro to the rescue. This time, Conrado Mangapit rushed to our aid. He’s a tax consultant and instructor with the Chesapeake Bay Development Group in Maryland. He had this to say about obtaining a FEIN:

If you are a sole proprietor filing a Schedule C and have NO employees subject to federal/state income tax withholding, Social Security and Medicare withholding you will not require a federal employer tax identification number.

Hmm… so it looks as if home-based business owners like myself are in the clear. We’re not compelled to seek a FEIN if we’re working alone. Your business tax forms will require nothing more than your social security number if you’re the only one in your biz and you’re blessedly unincorporated. No muss, no fuss. I can dig it, can you?

When a FEIN Becomes Important

Now it’s time to navigate some issues that are a bit tougher to unravel. Namely: what to do when it’s time to expand. One fundamental truth about business is that, eventually, everyone will come to the same major crossroads. Expand, or resign yourself to the maximum amount of earnings you can generate on your own.

I’ve found myself in this exact place recently. I’ve know that no matter how well I think I can write, I’ll eventually reach a point where I can no longer raise my rates for new clients. That’s when my earnings will cap, and I will no longer be able to increase my annual income. Hence, the crossroads. I could accept my fate and toil away at that amount forever… or I could choose to expand my biz.

I can’t imagine that anyone ambitious enough to work at home would choose to paint themselves into a corner by refusing to branch out. I know I certainly wouldn’t. Which brings us back to the question of the day – once you begin taking on outside help, is it time to finally obtain that FEIN?

Answer: it depends. If you’re hiring independent contractors, then you may not need one. If you’re hiring full-fledged employees, however, you will need one for certain. The SBA has a great analysis of the difference between independent contractors and employees, so check it out when you have the time. After I gave it a read, I learned that in my particular situation, I would do best to hire other independent contractors to work with me at arm’s length until I grow into a biz that can actually sustain employees.

Check out this page on the official IRS website and take the interactive quiz. It will ask you questions about your business situation and advise whether you should obtain your FEIN.

Even if you take the quiz and discover you don’t have to secure a FEIN, in some cases, in may still be a good idea to snag one anyway. Sole proprietors are beginning to elect to use a FEIN in much greater numbers – even when they don’t need it – simply because having one dramatically reduces the chances of identity theft. Plus, many banks now require a FEIN to open your business account, so it’s worth looking into.

If you decide to go for it, you’ll need to complete the Form SS-4 to get your new FEIN. Make sure you do it directly through and steer clear of any websites that ask you for payment in order to obtain one for you. It’s a common scam. Moreover, filling out and filing the form is as straightforward as it gets. Easy-peasy. Just go to the source and take care of it on your own.

If you’re still unsure about how to proceed after reading all this, then just take the plunge and get one already! Can’t hurt, and if you do decide to expand in the future, you’ll already have that task checked off your “to-do” list.

Until next time, my tax-talking tulips!

Making Cents Count,