A Taxpayer Identification Number (TIN) is a unique number used by the US Internal Revenue Service (IRS) to track individuals, businesses, and other entities for tax purposes. Whether you’re filing personal taxes, running a business, or addressing other financial obligations, you need a TIN to comply with IRS requirements. Below, we’ll explain the different types of TINs available and why a TIN matters for individuals and businesses.

What’s in this article?

• What are the different types of TINs?
  
• Why is a TIN important?
  
• How TINs are used by the IRS and other agencies
  
• How to determine which type of TIN you need
  

What are the different types of TINs?

There are four main types of TINs used in the United States. Each serves a unique purpose and applies to a specific set of taxpayers or businesses. Here’s a closer look at each type.

Social Security number (SSN)

Individuals use their SSNs to file taxes and identify themselves to various government agencies. Sole proprietors and single-member limited liability companies (LLCs) can also choose to use their SSNs to file business taxes rather than an Employer Identification Number (EIN). If your business has employees or works with independent contractors, you’ll likely need to collect their SSNs for reporting purposes – such as when you issue a 1099-NEC form for non-employee compensation.

The Social Security Administration (SSA) typically issues these identifying numbers either at birth (for US citizens) or when you receive work authorisation, but some people who are eligible might need to request one.

EIN

An EIN functions like an SSN for businesses. Companies including corporations, LLCs, partnerships, and non-profit organisations use their EINs to file taxes, open business bank accounts, apply for licences, and handle payroll.

To receive an EIN, you can apply online through the IRS website, by fax, by post, or by phone. It’s free to obtain and the process is usually quick, especially if you apply online.

Individual Taxpayer Identification Number (ITIN)

An ITIN is used for individuals who aren’t eligible for an SSN but are required to file taxes in the US. This applies to non-US residents and non-residents filing US tax returns, as well as dependents or spouses of US citizens or residents who can be claimed as dependents. Businesses might encounter ITINs when working with foreign nationals who pay US taxes, such as non-resident independent contractors and foreign investors.

You must file Form W-7 with the IRS to receive an ITIN. It can take up to seven weeks to receive your ITIN after applying.

Preparer Tax Identification Number (PTIN)

The IRS issues PTINs to tax preparers such as certified public accountants (CPAs), tax advisers, and other professionals who file taxes on behalf of clients. Unlike other TINs, PTINs must be renewed each year and help the IRS keep track of who actually prepared a certain federal tax return or refund claim.

If required, you can apply for a PTIN either online using the IRS website or by mail.

Why is a TIN important?

Businesses use TINs for a variety of purposes. Here are the reasons why it’s important for businesses to have a TIN:

• Tax compliance: The IRS uses your TIN to track your tax payments and obligations. Filing without the proper TIN, or with an incorrect one, can lead to fines, backup withholding on payments, and slower tax processing.

• Legal compliance: The IRS requires a TIN for activities ranging from filing taxes and paying employees to withholding taxes. You can’t legally conduct business, hire employees, or withhold taxes without the appropriate TIN.

• Banking and financial transactions: Financial institutions use your TIN to verify your business’s identity when you open a bank account, apply for loans, or seek other financial services. A valid TIN is required to access financial tools ranging from lines of credit to payroll accounts.

• Employee and contractor payments: When you’re running payroll, you need to ensure you have accurate TINs for each employee and independent contractor. Without the correct TINs, you can’t issue W-2s or 1099s, which can cause tax withholding and reporting issues.

• Credibility: Whether you’re negotiating contracts with vendors or working with financial institutions, having a registered EIN or TIN shows your business is established and following federal tax laws. Certain transactions can also require one, such as creating vendor accounts and applying for commercial insurance.

• Audit preparedness: Proper TIN documentation is required to complete an audit. TINs link your income, payments, and withholdings with your business.

How TINs are used by the IRS and other agencies

TINs serve as unique identifiers for individuals and businesses in a wide range of contexts. Below are some of the ways the IRS and other agencies use TINs.

IRS

Tax filings: The IRS uses TINs to track all tax-related activity and verify that individuals and businesses are accurately reporting their income. The IRS uses these numbers to match reported earnings with submitted tax forms for consistency across filings. The IRS also uses TINs to properly credit taxpayers’ payments and refunds.

Withholding and payments: Businesses use employee TINs (usually SSNs) to properly withhold income tax from payroll. Similarly, payments made to independent contractors require either an SSN, an EIN, or an ITIN. These are used to ensure proper tax withholding.

Tax credits and deductions: The IRS uses TINs to verify eligibility when businesses or individuals claim credits or deductions. For example, businesses that claim the Work Opportunity Tax Credit must provide TINs for qualifying employees.

SSA

The SSA uses SSNs to track wage reporting for US-based employees. Businesses file employee wages and benefits with the SSA through annual W-2 filings, which include the employee’s SSN. The SSA uses these records to calculate Social Security benefits when employees retire or file for disability.

State tax agencies

State revenue departments rely on TINs for income tax collection and enforcement at the state level. They use TINs to verify that taxpayers are accurately reporting and paying their obligations to the state.

Financial institutions

Banks, investment firms, and credit unions use TINs to report financial information to the IRS. For example, when interest or dividends are paid out on an account, the financial institution must issue a 1099 form that lists the recipient’s TIN. The IRS cross-checks the information to ensure that taxpayers are accurately reporting investment income on their returns.

Financial institutions are also required to gather TINs as part of the Know Your Customer (KYC) process to confirm account holders’ identities. This helps mitigate the risk of money laundering and tax evasion.

Department of Labor

The Department of Labor uses TINs to track employees’ earnings for unemployment insurance. Employers must report wages and tax withholdings using TINs so that workers are eligible for unemployment benefits if they lose their jobs.

Department of Health & Human Services (HHS)

The HHS uses TINs (in the form of SSNs) to track eligibility for Medicare, Medicaid, and other federal programmes that provide benefits based on income or employment status. It uses TINs to grant individuals the benefits to which they’re entitled and to combat fraud and improper payments.

Foreign governments and international tax agencies

In some cases, TINs are shared with foreign governments for tax treaty purposes or to comply with international tax regulations. For example, the Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report TINs for US account holders to help fight tax evasion involving offshore accounts.

Audits and enforcement

Audits, whether by the IRS or by other regulatory agencies, rely heavily on TINs to track financial transactions, validate tax filings, and confirm that income is being accurately reported. Agencies use TINs to trace income and payments across sources and check for fraud or non-compliance.

How to determine which type of TIN you need

Choosing the right TIN depends on your specific circumstances. Here’s how to determine which TIN you’ll need.

SSN

US citizens, permanent residents, and some non-resident workers need SSNs. If you’re a US citizen or authorised to work in the US, you’ll use your SSN to file personal income taxes, receive wages, and access Social Security benefits. If you’re a sole proprietor or single-member LLC who doesn’t have employees or meet other requirements for an EIN, you can also use your SSN to file your business income with your personal tax return through a Schedule C (Form 1040).

EIN

An EIN is necessary for most businesses, including all corporations (e.g., S corporations [S corps], C corporations [C corps]), partnerships, and multi-member LLCs. Any business that has employees, withholds taxes on income paid to non-US non-residents, or files certain tax returns – such as employment, excise, or alcohol, tobacco, and firearms taxes – must have an EIN. An EIN is required to open a business bank account, apply for loans, or establish credit under a business name.

ITIN

Non-US citizens or residents who are not eligible for an SSN but are required to file taxes in the US must have ITINs. If you’re a non-US non-resident earning income in the US but do not qualify for an SSN, you use an ITIN on tax filings. For example, a foreign investor in US real estate would need an ITIN to report rental income. ITINs are also used by spouses or dependents of US citizens or non-US residents who are not eligible for SSNs but can be claimed as dependents on tax returns.

PTIN

Paid tax preparers (i.e., anyone who prepares federal tax returns for compensation) must have a PTIN. These include CPAs, tax advisers, and other professionals who file taxes on behalf of clients. This number must be renewed annually.

If you’re unsure which TIN applies to you, consider your business’s structure and obligations, your residency status, and whether you have employees. Consult a tax professional to confirm you’re using the correct TIN for your specific situation to avoid compliance issues and potential penalties in the future.