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What is an employer identification number?
An EIN is a unique federal employer identification number for your business entity, much like a social security number, but for your organization. It is also known as the nonprofit tax ID number or federal tax identification number. Both for profit businesses and nonprofits need them.
Reasons why you need an EIN for your nonprofit
1. Getting tax-exempt status with the IRS
Most nonprofit organizations, or tax exempt entities, need an EIN to apply for tax-exempt status under Section 501(c)(3) of the Internal Revenue Service. While all nonprofits don't pay taxes, they have to file certain forms and follow specific rules to maintain tax-exempt status. Those applications require an employee identification number.
The IRS uses EIN numbers to track tax filings and compliance with federal tax regulations.
2. Opening a bank account
Most financial institutions require nonprofits to submit an employer identification number to open a business bank account. Opening an account for your nonprofit organization, allows you to keep its funds separate from the directors' finances.
You will also require an EIN to apply for business loans. Some charitable organizations can choose to use business loans to invest in high-priced items, like a new location.
3. Managing payroll and taxes
Nonprofits must also have an EIN to report employment taxes to the IRS. This includes withholding income tax, social security, and medicare taxes. They must include their EIN on W-9 forms when sharing information with employees for tax purposes.
A tax exempt organization must also use the EIN on 1099 forms sent to freelance professionals and contractors.
4. Complying with state laws
Some states require an EIN for tax registrations, business licenses, fundraising registrations, and other compliance activities. An EIN also helps establish the organization's credibility and legitimacy in the eyes of donors, partners, and stakeholders.
5. Applying for grants
Many foundations and corporations that provide nonprofit grants require organizations to have an EIN to apply for funding. This ensures that grants are awarded to legitimate nonprofits.
Prerequisites for getting an EIN
The IRS mandates that specific organizations secure an EIN for reporting requirements. Both nonprofit and for-profit organizations, including partnerships, corporations, and multi-member LLCs, need an EIN to file their taxes.
An organization with employees will need an EIN to pay and file payroll taxes, even if it's a sole proprietorship.
Other organizations need an employee identification number if it:
- Has employees
- Files employment, excise, tobacco, alcohol, and firearms tax returns
- Withhold taxes on income, other than wages, paid to non-residents
- Have a Keogh plan
- Operates as a farmers' cooperative, plan administrator, or certain type of trust
How to get an EIN for your nonprofit - Application process
1. Check for eligibility
The IRS lets you apply for the EIN via an online application process, by fax, phone, or mail. Applying online is the easiest way to get an employee identification number, making it the best choice if you're eligible. To apply for an EIN number online with the EIN application you must meet the following criteria:
- Nonprofits must be located in the US or US territories
- Unless the applicant is a government entity, the responsible party must be an individual, not an entity. They must also have a social security number or individual/personal taxpayer identification number (ITIN)
You can still apply for an EIN if you do not meet these qualifications. You will need to file Form SS-4 and submit it via fax or mail.
2. Gather required information
The IRS allows one online application session per responsible party each day. Ensure you complete the application in one session, as there is no option to save and return later.
The sessions expire after 15 minutes of inactivity, in which case you must start over. It is better to gather all the necessary basic information to complete the application before beginning the application. Here's what you'll need:
- Corporation type
- Full legal name and SSN or ITIN
- Business address
- Corporation name
- Organization address
- State where you're incorporated
- The date you started or incorporated your organization
3. Submit the application
When you apply online, an EIN will be issued immediately after you fill out your application. You may have to wait longer if you apply via email or fax.
A fax application usually takes four business days to process. For applications via mail, it may take four weeks to receive your employer identification number (EIN).
Common mistakes to avoid when applying for an EIN
1. Applying before incurring tax liabilities
If you believe your nonprofit qualifies for tax-exempt status, be sure it is formed legally before you apply for an employee identification number. The IRS requests the approved legal name and incorporation date.
2. Selecting the wrong business structure
Under IRS Section 501(c), different types of nonprofits are specified, including public charities, private foundations, trade associations, and pension funds. You must be clear about your organization's classification and understand your specific nonprofit type.
3. Designating the wrong person for the application
The IRS clearly states that the applicant filling out the application form should be an individual. This person, typically the founder or principal officer, must control the nonprofit's finances and operations.
If there are any changes to the responsible party for your nonprofit, you need to fill out Form 8822-B and mail it to the IRS as soon as possible.
4. Filling out the wrong form or information
When applying online for an employer identification number, you must complete only one form. Form SS-4 is specifically designated for the employee identification number. Look for it on the official IRS website and carefully complete the necessary details.
Final words on how to get an EIN for Nonprofit
Nonprofit organizations must have an EIN to file tax returns with the IRS when they start their organization. They also need this unique nine-digit number to open a bank account, maintain state compliance, and manage employees' payroll.
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