The Problems with Employer Identification Numbers (EIN)

 In Accounting & Bookkeeping Tips, Michigan Accountant

When it comes to EIN Numbers having more is not better, in fact, it could lead to a lot of grief and have you reaching for the Excedrin.  Let me start with a few definitions to frame this:

  • EIN’s also known as, Federal Employer Identification Numbers or FEIN’s are used to match a business or entity to transactions, typically to a taxing jurisdiction such as a State or Treasury Department-the IRS.
  • EIN’s are created by the IRS using an SS-4 Form and can be created online at IRS.gov.
  • EIN’s are required for businesses that have employees.  Employee withholding and business payroll tax expenses reference EIN’s in transactions with the IRS.  State authorities (like Michigan) typically use EIN’s for sales tax transactions.  Banks sometimes require EIN’s in lieu of an Owner’s Social Security Number for disregarded Entities like Sole Proprietorships and Single-Member LLC’s.

Seems harmless enough, right?  It is, until you start digging into the details.  Accounting is always about detail and understanding the way in which systems and protocols work can help you to act before issues become problems affecting your productivity and sanity.

Ok, so here is a common scenario.  I’ve had more than a few clients that changed the name of their business and as a result created another EIN.  No harm yet, until this same business associates some transactions with one EIN and other transactions with the other EIN.  Now this business has a problem.  One taxing authority will look to tie tax transactions that this business filed with one EIN to a TAX RETURN.  In other words, this business will be “on the hook” from the tax authorities to file two separate tax returns even though there is only ONE business entity.

I’ve seen instances where sales tax payments were tied to one EIN, payroll tax and withholding obligations were tied to a different EIN and their business checking and credit card accounts were tied to a third EIN!

If this happens, you have to go through a process of dis-associating and re-associating transactions to put everything under one EIN.  This gets further complicated if the business has an external payroll provider, because this provider will interpret any requests to change an EIN as an Entity Change.

What is an Entity Change? An Entity Change is a fundamental reorganization of the business which requires a change to its taxable status (and change to the type of return that needs to be filed) as defined by the IRS.  Some examples:  Businesses that change from a Single-Member LLC to Multiple Members, or a Partnership that changes to an S or C-Corporation are Entity Changes.  A business that simply changes its name with no associated organizational changes does NOT constitute an Entity Change.  Paraphrasing from IRS.gov, businesses that change their names with no associated organizational changes, do not need (and should not-my words) to create a new EIN.  File an amendment with your state to change the name of your business and then, write a letter to the IRS to have them associate the new name with your existing EIN.  If you have more than active EIN, you should contact the IRS and have them “close the account” associated with this EIN.  Remember, EIN’s can be abused just like Social Security Numbers, so safeguard your business by rendering unnecessary EIN’s, inactive.

Finally, let me preface this One Business/One EIN argument.  Yes, a business could have multiple EIN’s to track separate divisions, or locations, for example, if the business chooses to create a separate legal/accounting structure for purposes of separating these transactions.  I’m focusing on the much larger numbers of businesses that will not have a need for this.

From ice cold Michigan-That’s this week’s helpful tip from The Mobile Accountant.

 

 

 

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