In the United States, the Internal Revenue Service (IRS) processes over 150 million individual and business tax returns every year. Each of the successfully processed returns has one critical thing in common: an accurate tax number.
Without tax numbers, processing taxes swiftly wouldn’t be possible. Here’s a look at what tax numbers are and why they’re essential.
What Are Tax Numbers?
Tax numbers are unique identifiers that allow the IRS and other tax-processing entities – such as state tax offices – to easily determine who’s submitting forms and returns. Generally, federal tax numbers come in two primary forms: Social Security Numbers (SSNs) and Employer Identification Numbers (EINs). However, some other tax numbers may apply to specific individuals or companies, such as state tax ID numbers or individual taxpayer identification numbers (ITINs).
When Do You Need a Tax Number?
Tax numbers are essential because they allow the IRS and other tax-processing entities to quickly associate a tax return or other tax-related documentation with an individual or business. Primarily, these are required because names, birth dates, and similar identifying data aren’t guaranteed to be entirely unique.
For example, many individuals may have the same first, middle, and last names. As a result, the IRS can’t rely on those data alone to determine whose tax forms it’s processing. Since tax numbers are completely unique, they’re a straightforward way to expedite processing and reduce the odds that a tax filing or related document is attributed to the wrong individual or business.
How Do You Use Your Tax Number?
Tax numbers are used for several purposes. The most commonly known one is for tax filings. All tax documents require the entry of a unique tax number to associate returns and other filing documents with the correct individual or business.
However, tax numbers are also critical during a variety of other activities. For instance, tax numbers are typically required when engaging in specific financial or income-related activities.
Opening a new bank account requires a tax number, the nature of which depends on the type of bank account. Bank accounts for individuals need usually need an SSN or ITIN. If you’re opening a business bank account, an EIN is often necessary, though sole proprietors may be able to use an SSN instead at some institutions. Similarly, personal or business loans and credit cards usually require tax numbers on the application.
Tax numbers are also necessary when securing new employment. Employers collect SSNs from workers as part of the payroll process. That allows them to ensure that any collected taxes are attributed to the correct individual and lets them create accurate W-2s during the tax season. For contractors, freelancers, and similarly self-employed individuals, tax numbers are needed to log the amount of funds required and to produce a 1099 at the end of the year, if one is needed.
For businesses, an EIN is potentially necessary to get a business license or form specific types of business entities. They’re also often essential for securing particular kinds of operating permits.
Ultimately, having the correct tax numbers is essential for handling a wide range of tasks. As a result, it’s critical to secure the needed ones quickly if you don’t have them already.
