Your state tax ID and federal tax ID numbers — also known as an Employer Identification Number (EIN) — work like a personal social security number, but for your business. They let your small business pay state and federal taxes.
Your Employer Identification Number (EIN) is your federal tax ID. You need it to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits.
It's free to apply for an EIN, and you should do it right after you register your business.
Your business needs a federal tax ID number if it does any of the following:
Apply for an EIN with the IRS assistance tool. It will guide you through questions and ask for your name, social security number, address, and your "doing business as" (DBA) name. Your nine-digit federal tax ID becomes available immediately upon verification.
If you already have an EIN, you might have to change or replace it with a new one if certain changes have occurred with your business, depending on your business structure and the kind of change that occurred. Check with the IRS to determine exactly whether you need to change or replace your EIN.
John and Kelly’s auto repair shop needs federal and state tax ID numbers to file taxes, hire employees, open a bank account, and more.
The federal ID number, what’s called an “Employer Identification Number” (EIN), is a unique nine-digit number issued by the I.R.S. that identifies John and Kelly’s business — sort of like a Social Security number.
John and Kelly apply for an EIN online via the IRS EIN Assistant, free of charge. They provide information about themselves, as well as their business, and their EIN is available immediately upon verification.
Because their business is located in a state that taxes income, John and Kelly have to get a state tax ID as well. Requirements vary by state, so John and Kelly contact their state tax office to find out about the specific steps they must follow to obtain a state tax ID.
They follow a process similar to the process for obtaining a federal ID.
John and Kelly’s auto shop has its federal and state tax ID numbers, and can pay taxes and handle other business functions.
The need for a state tax ID number ties directly to whether your business must pay state taxes. Sometimes, you can use state tax ID numbers for other functions, like protection against identity theft for sole proprietors.
Tax obligations differ at the state and local levels, so you'll need to check with your state's websites.
To know whether you need a state tax ID, research and understand your state's laws regarding income taxes and employment taxes, the two most common forms of state taxes for small businesses.
The process to get a state tax ID number is similar to getting a federal tax ID number, but it will vary by state. You'll have to check with your state government for specific steps.
Seven states have no income tax, and another two only impose tax on income from dividends. States that do tax income will determine figures based on business structure.
Taxes also vary by state on employment insurance and workers’ compensation insurance. Understand these and other implications in calculating startup costs and choosing a business structure.
Visit your state's website to identify whether you need to get a state tax ID number in order to pay state taxes.