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Taking Care of Business
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Old February 6th, 2008, 11:45 AM   #1
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Federal tax id or SSN?

Hello all,

I'm moving at the speed of light to get my business together. So far I got my assumed name, a paypal account (not yet verified because I haven't got my bank account set up yet), sent in my zoning form for the local business privilege license.

things left to do: get a state tax id, bank account...

but i'm stuck on whether i should get a federal tax id from the IRS or just file with my SSN on my own taxes. This is pertinent because I have to use one or the other to set up my business bank account, and I'm expecting a total of $4k for a project by the first weeks of march.

The business structure is a sole proprietorship, I have a separate full time income and I think this is what my banker is so worried about (she is all but begging me to get a federal tax id).

So what are the differences/benefits/drawbacks? If I get a federal tax id will i still file the business with my personal income since it's a sole proprietorship, or will i file the business separately, and what will that change?

thanks in advance!
-Jonathan
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Old February 6th, 2008, 01:03 PM   #2
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If you have employees, you'll need to have a Federal EID. If you don't have employees, it's optional. That's it. No other benefits, privileges or drawbacks. You will still be able to operate as a sole proprietor and file a standard 1040 + Schedule C at tax time.

Getting a Federal EID is free and fast. I don't see any reason you wouldn't get one. I guess one small advantage is that it prevents you from spreading around your SSN more than is necessary.
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Old February 6th, 2008, 01:14 PM   #3
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Originally Posted by Jonathan Scruggs View Post
The business structure is a sole proprietorship, I have a separate full time income and I think this is what my banker is so worried about (she is all but begging me to get a federal tax id).
Chris is right on. And I don't know why your banker would be worried. It's probably a good idea to get a separate checking account for your business, even if it's not strictly required for a sole proprietorship. You can open a business acount with or without an EIN.

- Martin
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Old February 6th, 2008, 02:13 PM   #4
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made my decission.

so I made my decision. went to irs.gov and applied online. literally took less than five minutes and i have my number and confirmation letter. easiest thing i've ever done. what pushed me over the edge was the final confirmation I got from a quick call to a cpa: you still file on your personal income tax return (form 1040) using a schedule c, even though you're using an EIN. hope this helps anyone else who finds themselves in my position, asking 10 different people and getting 20 different opinions. cheers and thanks to chris d. for the input. and now...to the bank!

peace.
-jonathan
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Old February 8th, 2008, 09:40 AM   #5
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Originally Posted by Martin Pauly View Post
It's probably a good idea to get a separate checking account for your business, even if it's not strictly required for a sole proprietorship. You can open a business acount with or without an EIN.

- Martin
I'll beg to differ here. A separate account is absolutly needed. It is but one step in a series of steps that will help keep the IRS from trying to declare your side line business as a hobby. If that happens then all the income is still reported but NO EXPENSES may be deducted.

Other tips for ensuring that they can not declare it a hobby include advertising, a dedicated place to do business from (a spare room is fine as long as it is not also the kids play room). In home based catering there are instances where it was argued that since they did not have a seperate freezer to keep 'business' supplies of food seperate from home food it was a hobby. I doubt it would be a far of a streach to apply that logic to using your GL-2 to shoot Christmas morning video.

Getting the checking account is likely the least expensive item to help show your intent to turn a profit.

I'm not saying that it happens all the time but its like the music rights stuff, if the IRS wanted to make an example out of you.....

Randy
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Old February 8th, 2008, 12:38 PM   #6
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JOn. FWIW...I could not open a business checking account without a federal tax id number.

Plus you want to keep your accounts seperate. Any money you make from your business goes into the business account, much easier come tax time.
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Old February 8th, 2008, 01:31 PM   #7
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Getting the checking account is likely the least expensive item to help show your intent to turn a profit.
I'm not saying that it happens all the time but its like the music rights stuff, if the IRS wanted to make an example out of you.....
Good point! I hadn't thought about it that way, but you are right.

Based on what my accountant tells me, this is most important for side businesses that make a loss. If at the end of the year of have turned in a profit, the IRS is not going to complain about the extra tax dollars. But if you keep making losses, you may need to proove that it is your intention to run a profitable business.

- Martin
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Old February 13th, 2008, 06:30 AM   #8
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While you're at it, apply for an American Express Business card. It makes it easy for you to keep track of business purchases. Since you will pay your balance in full each month you won't be tempted to accumulate a balance like you might with a Visa or MC. Debt sucks.

Good for you gettting advice from a CPA.
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Old February 19th, 2008, 12:26 AM   #9
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I currently run my business as a sole proprietor and use a fed id instead of my ss#. Reasons I went this way are:

1) Many banks won't let you open a business account with a soc#. The ones that will let you, won't let you put a business name on the checks or the account has to say something like "your name dba your business". I wanted checks with my business name, so I got the fed id.

2) You need to give that number to employers/clients so they can issue you a 1099 form at then end of tax year. That's a lot of paper flying around with your soc# on it and you have no idea how secure that info is. I still find some clients want to know my soc# for 1099 purposes. If they ask, i give it to 'em.

3) I'm planning to hire employees someday, so might as well have it.

Tax-wise, it really makes not difference, as a SP, that tax id will be tied to your soc# so it really doesn't change the paperwork. You should get an accountant anyway. The taxes get complicated quickly. An accountant is worth every penny. They will save you more money in the long run than you pay them to prepare your forms.
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Old February 19th, 2008, 08:27 AM   #10
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My own experience:

I am a sole proprietor and I use my SSN. I had no problems opening a business checking account or getting a business credit card. I didn't have any problems registering my business with my county's Register of Deeds for a Certificate of Assumed Name. The lack of the latter is often what presents difficulties with bank accounts etc. A digital signing certificate for software is one example.

My wife is a CPA, has her own S-corporation and has set up many S-corporations for her clients. In my case, she insists that I do not co-mingle the assets of my sole proprietorship with my personal assets. She didn't see any reason to not use my SSN for tax ID purposes.
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