“Do you need a tax ID number for your online business? That can depend on the services that you plan to provide.Jim Corwin/Getty Images
Meet Joe and Amy. Joe owns an online iPhone repair company and Amy sells adorable crocheted animé elephants on Etsy. Do they need tax ID numbers for their online businesses? Let’s find out.
The phrase tax ID number most likely refers to a federal employer identification number (EIN). However, it could also refer to a state tax ID number. We’ll break down both and help Joe and Amy decide which numbers they need.
Determining If You Need an EIN Number
Sole proprietors and limited liability corporations (LLCs) with no employees can use a personal Social Security number in place of an EIN. Joe’s LLC has employees, so he is required to get an EIN number. Amy, however, is the sole proprietor of her business, so she is not required to get an EIN number.
Had either of them operated a business that was required to file employment, excise or ABT (alcohol, tobacco and firearms) tax returns, or if their business involved certain types of organizations (like trusts, estates, nonprofits), then they would have been required to get an EIN number. The Internal Revenue Service has a helpful online quiz that business owners can take to determine if an EIN is required for their business.
Determining If You Need a State Tax ID Number
If you’re in the business of selling things online, chances are you need to get a state tax ID number (also called a sales tax permit, reseller certificate or similar).
Because Amy is selling goods online, she’s most likely required to charge her clients sales tax (and pay sales tax on the goods she sells), for which she’ll need a state tax ID number. Joe sells a service (phone repair) as opposed to inventory. However, if he charges his customers for parts, he may be required to collect sales tax on those parts. So he’ll likely need a sales tax ID number as well.
The good news for both Amy and Joe is that their state tax ID number enables them to buy their raw materials at wholesale prices. So, her yarn and his parts should be more affordable, and they can pass this savings along to their clients.
Next, Amy and Joe need to figure out how to obtain the tax ID numbers they need. Click over to the next page to discover how.
Lots More Information
- How Creating an Online Business Works
- How Small Business Taxes Work
- How to Get a Tax ID Number
- How to Get a Business License
- How Social Security Numbers Work
- How the IRS Works
More Great Links
- Sales Tax 101 for Small Business Owners and Online Retailers
- BizFilings.com. "Understanding Sales Tax in Service Industries." May 12, 2012. (April 19, 2015)
- IRS.gov. "Do You Need an EIN?" (April 19, 2015) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Do-You-Need-an-EIN?
- IRS.gov. "Employer ID numbers." (April 19, 2015) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-EINs
- Messerschmidt, Laura. "How to Determine Your Sales Tax." Etsy. Oct. 3, 2012. (April 19, 2015) https://www.etsy.com/seller-handbook/article/how-to-determine-your-sales-tax/22717969977
- McGrath, Skip. "Sales Tax and the eBay Seller." EBay. Sept. 13, 2007. (April 19, 2015) http://www.ebay.com/gds/State-Sales-Tax-and-The-eBay-Seller-/10000000002187060/g.html
- Parker, Tim. "What Is an EIN Number and Do You Need One?" Intuit.com. May 13, 2013. (April 19, 2015) http://quickbooks.intuit.com/r/money/what-is-an-ein-and-does-your-business-need-one/