Managing taxes is still complex for many organizations while defining tax identification numbers is particularly daunting. For individuals and businesses in the U.S., the IRS provides two crucial identifiers: The two common types of numbers used in context are the Individual Taxpayer Identification Number (ITIN) and the Employer Identification Number (EIN).
Even though they are meant for different tasks, there are cases whereby you might need one or the other depending on the circumstances. It is equally important as an entrepreneur dealing with your business while you are a non-resident or when paying tax, or dealing with personal tax issues to know when and why you need both. Here, we are going to provide information about both of them including when they should be used and how you can use them effectively.
Understanding the Difference Between an ITIN and an EIN
ITIN is an eleven-digit number for those who do not qualify for the SSN but require the SSN otherwise for tax filing in the United States of America. An EIN is assigned to businesses for identification purposes and is used when filing taxes.
Where the ITIN is used for identifying an individual, the EIN on the other hand is used in entities such as corporations, LLCs, or partnerships. Each caters to a specific niche in the tax system and provides for the standard laid down by the IRS. Understanding which BC identification applies to you is the initial process of tax efficiency regardless of whether you are an individual taxpayer or a business person.
Situations Where You Need an ITIN
If you are a non-resident or resident alien who is legally mandated to file for a U.S. tax return but cannot be issued an SSN then you need an ITIN. ITINs are most often associated with those individuals who derive income in the USA, and or are dependent on the USA Taxpayers.
The main distinction between an ITIN vs EIN lies in their purposes; an ITIN is used for individual tax identification, while an EIN is for businesses. Moreover, ITINs are required for claiming the tax exemption or for filing a dependent category. When not operating a business, ITIN is important when you are earning personal income and paying taxes therefrom.
When You Need an EIN for Your Business?
A business will need an EIN when hiring employees or if the entity is incorporated as a partnership, or an LLC. It is necessary for tax purposes, for registering a business bank account, and the acquisition of business licenses. If for example you are a sole trader and do not have employees then you may not need the EIN unless when mandated to do so for tax purposes. ITIN and EIN differ primarily in their usage; while ITIN is an identification number for individual tax purposes and an EIN is for business purposes. EINs simplify the process of managing employee payroll and completing tax documents, which is also a beneficial and necessary aspect of maintaining compliance with the IRS for any sized enterprise.
Situations Requiring Both an ITIN and an EIN
Only in some situations, a separate identifier is needed, for example,e if a non-resident alien owns a business based in the United States. In such cases, while the ITIN is employed in personal tax filing, the EIN is used for filing the business entity’s taxes.
International business individuals establishing a U.S. limited company or employing staff usually require both to control their individual and company taxation. Dual identifiers are also needed in situations where the person filing returns is earning income through his business as well as personal income from other sources.
How to Apply for an ITIN and an EIN?
To apply for an ITIN one has to fill out IRS Form W-7 with other documents such as the legitimacy of the physical, foreign character. The application can be done through the IRS, or by a certified acceptance agent. To apply for an EIN, file Form SS-4 online, by fax, or by mail. The online application option is the fastest one and provides issuance on the spot.
Make sure that all necessary forms are properly completed to prevent a hold-up. Therefore for all those who need both an ITIN and an EIN, it is advised to complete the ITIN application form first before going further to apply for the EIN to avoid complications with the Internal Revenue Service.
Conclusion
The ITIN and the EIN are both used in organizing taxes in the United States, but they are not the same. An ITIN is for a person who needs a tax identification number but fails to secure an SSN whereas an EIN is for business whether hiring employees or incorporated.
Sometimes, a person requires both ITIN and EIN, for example, if the person is a non-resident alien with business in the United States or if the person has earned income from both Enterprise and for self.