A tax identification number (TIN) is the 9-digit number used by the IRS for tax identification purposes. There are different numbers for people versus entities. You will have a Social Security Number (SSN) for an individual (or an Individual Taxpayer Identification Number (ITIN) for an individual who is ineligible for an SSN) or an Employer Identification Number (EIN) for an entity, which includes certain types of businesses, trusts, and estates, even if there are no actual employees.
People frequently ask us if they need to obtain a new TIN for their entity, trust, or estate. The answer is not always simple because it involves both legal and tax considerations, but hopefully this will be a useful guide.
Please note that financial institutions may erroneously believe a separate EIN is required when it is not actually. Before applying for one, check with your accountant. Fixing an EIN assignment done in error will be far more difficult than avoiding the error in the first place.
FOR AN ESTATE:
Generally, an estate is a distinct entity from the individual who died and it gets its own TIN. If an estate checking account needs to be opened, or property needs to be sold, then you will definitely need an estate EIN. If there are no assets to go through probate, no EIN will be needed. If taxable earnings need to be reported for the estate, they are reported under the estate’s EIN and the estate will file its own tax return (a Form 1041, not a 1040). In the final year of distribution, the estate will report earnings to the beneficiary(s) on a Schedule K-1, which is created under the estate’s income tax return.
FOR A TRUST:
Is your trust revocable? If it is, it is usually taxed to your SSN. If it’s a joint revocable trust with your spouse, usually the first person named uses his/her/their SSN. If taxable earnings need to be reported for the trust, it is treated for tax purposes as if you personally received that money, not your revocable trust, and thus it will be included on your Form 1040. When the SSN owner whose number is linked to the trust dies, the trust (or part of it, if jointly owned) will become irrevocable, so read on.
Some revocable trusts do have a separate EIN, whether for ease of administration or applied for in error. Those trusts usually end up reporting earnings as if the beneficiary received the money themselves. A Grantor Letter is prepared for the trust (in lieu of a tax return) to create a paper trail that leads from the trust’s EIN to the beneficiary’s SSN.
Is your trust irrevocable? Generally, an irrevocable trust is a distinct entity from you as a person, which means it needs its own TIN – which will be an EIN in this case. An irrevocable trust can be irrevocable from the time of formation, or it can become irrevocable upon death. If taxable earnings need to be reported for the trust, they are reported under the trust’s EIN and the trust will file its own tax return (a Form 1041, not a 1040). Entities have marginal tax rates in the same way individuals do; however, entities reach the next margin faster than individuals. Some trusts distribute earnings to the beneficiaries and the beneficiary’s share of the earnings is reported on a Schedule K-1, which is created under the trust’s income tax return.
FOR AN ENTITY:
If you are operating a sole proprietorship DBA (doing business as) and have not formally created an entity on file with the State, the IRS treats that entity the same as you personally, so no separate EIN is needed. You can open bank accounts using your own SSN.
If you have created a formal entity (corporation, LLC, partnership) that is on file with the State, you may need an EIN. Per the IRS, if you can answer “yes” to any of the following questions, you need an EIN for the entity:
- Do you have employees?
- Do you operate your business as a corporation or a partnership?
- Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
- Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers’ cooperatives
- Plan administrators
LLCs frequently struggle with the EIN question. According to the IRS,
An LLC is an entity created by state statute. The IRS did not create a new tax classification for the LLC when it was created by the states; instead IRS uses the tax entity classifications it has always had for business taxpayers: corporation, partnership, or disregarded as an entity separate from its owner, referred to as a “disregarded entity.” An LLC is always classified by the IRS as one of these types of taxable entities. If a “disregarded entity” is owned by an individual, it is treated as a sole proprietor. If the “disregarded entity” is owned by any other entity, it is treated as a branch or division of its owner.
As a law office, we do not know the best tax classification that will be needed for our clients’ LLCs, so we refer them on to their accountants to determine if a new EIN will be required.
HOW DO YOU APPLY FOR AN EIN?
Applying for an EIN is a free service offered by the Internal Revenue Service. Beware of websites on the Internet that try to charge for this. Applications can be by mail, fax, or electronic on the IRS website.
All EIN applications must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner, or trustor. This individual or entity, which the IRS will call the “responsible party,” controls, manages, or directs the applicant entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.
The IRS will only issue one EIN to a responsible party per day, and the responsible party will have to input his/her/their name, address, phone number, and SSN in order to apply.
The information presented on this website is general in nature and not intended to be legal advice. No attorney-client relationship will exist with Jones, Kuriloff & Sargent, LLC unless agreed to in writing. Please contact us to discuss your particular situation.