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socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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Need help/advise regarding EIN vs Social Security number filing

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Need help/advise regarding EIN vs Social Security number filing as Sole proprietor

What's your concern about the issue, specifically?
Customer: replied 2 years ago.

OK. I am self employed and work as an independent contractor and get my income as 1099. So far I was using my SS# XXXXX income and filing quarterly and irs taxes. Last year I opened a solo defined benefit pension plan. My plan administrator is suggesting to get my income and filing under a separate EIN due to DBP plan filings. I already have paid quarterly taxes under my SS this year. so the question is should I change my income reporting on 1099 and IRS tax filing including quarterly taxes to EIN from SS#? Should I incorporate? My annual income is about 700,000.

Should I change my income reporting on 1099 and IRS tax filing including quarterly taxes to EIN from SS#?

A: There are four reasons why an individual needs an EIN:

  1. You file bankruptcy under Chapter 7 (liquidation) or Chapter 11 (reorganization) of the Bankruptcy Code
  2. You incorporate
  3. You are a sole proprietor and take in partners and operate as a partnership
  4. You are establishing a pension, profit sharing, or retirement plan


Number 4, above, doesn't mean that your business requires an EIN -- it means that the retirement plan requires a separate EIN. Your facts do not suggest any reason why you require an EIN for your main business. It's entirely optional to you.


There is one reason why using an EIN may be of some value: ID theft protection. Using your SSN places you at personal risk, because you may have investment and other accounts listed with your SSN. When a business asks you for a W-9 form, if you provide an EIN, you are protecting disclosure of your SSN. You can switch whenever you like, because if you get an EIN for a sole proprietorship, it will be linked to your SSN by the IRS.


Should I incorporate?


A: Incorporation provides asset protection from personal liability. Forming an S Corporation can also be used to limit the amount of self-employment tax you pay annually -- if you can justify your salary as an officer of the corporation as being less than the $113,700 self employment tax maximum income. If you cannot reasonably justify paying yourself a lesser salary, and then passing through the remainder of your income as distributions from the S-Corporation, then the IRS may reallocate your earnings, and you will have accomplished nothing.


Consequently, the only real advantage to the corporate structure is to separate your separate assets from your business assets, and avoid potential liability if you are sued as a business entity.


If the asset protection avenue seems useful to you, then an LLC will serve as well as a corporation, and it has the benefit of lower administrative costs, because you can continue to use your Form 1040 Schedule C to report your LLC income. And, in this case, or the S Corporation case, you will need an EIN for the new entity.


Those are the options and benefits. Please let me know if my answer is helpful.


And, thanks for using!

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