How to apply for federal and state tax ID numbers and special business licenses and permits.
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How to get a federal and state Tax ID for business? Licenses? Permits?
Step 6 in our series of How to start a business in 10 steps podcasts
If you have listened to the last episode, you have the perfect name for your company. Another step or “must do” before you can go into business is to obtain a federal and state tax ID’s and apply for any necessary licenses or permits. So what are federal and state tax IDs? Federal and State Tax IDs are how our United States government keeps track of if you have paid your taxes. As you might have guessed, the government insists you have these so you can file your taxes properly.
A federal ID is like your personal Social Security number. You know, you put it on all of your tax documents. It’s also known as (EIN) or Employer Identification Number so, you’ll have to use it when you pay your employees.
I won’t go into how to pay your employees in this episode but just note, when you do pay your employees, you have to also tuck some money away for them into their social security fund for their retirement, and the government also has you as the employer match some of these funds. I’ll go into more detail on this in my book which will be published in the near future. For now, we are only focusing on the 10 steps to open your business and so I’m just going to talk about how to get your tax ID numbers. You have to apply for an EIN, The federal tax identification number…before you open a bank account, before applying for any additional business licenses or permits you need or even before you hire your employees. The great thing is, it’s free and it’s easy to apply for a federal and state tax ID number. Once you registered your business, it’s the next step you need to take. The IRS or our government has made this super easy to apply. Simply go to https://irs-gov-ein-number.com/ and choose your entity type. If you missed that link, I’ll also type this link in my episode notes listed on my website businessfashiontips.com If you don’t know what type of entity you are, go back and listen to our podcast episode 6 and that will walk you through it. I’m going in order here people. If you are on this step number 6 and haven’t listened to steps 1-5 yet, you need to go back and start from the first episode. Once you are on this form, it will ask you some basic information like the name of your company, it’s address, and principal officers and the state you are registered with. They ask for your state for a reason because they tie your federal ID number tax account to your state tax account and at the end of the year when you file, they better match up with the dollar amounts owed, or you will hear from them. So, once you are finished filling in this short form, they send you your Federal ID (again it’s also called your EIN) and I remember those two different names confusing me when I first got my EIN 25 years ago. Just know that sometimes they call it your fed tax ID and sometimes they call it your EIN. Once you push submit application, you will receive your Tax ID typically within 24 hours. You don’t need to hire an attorney or tax accountant just to obtain your EIN or state tax ID. Why pay hundreds or thousands to a professional for something that will take you 5 minutes to complete? Now getting the state tax ID may be a little trickier because you have to go to your state’s websites to get this ID. So go to a search engine and type in “register for a state tax ID in Minnesota” (substitute your own state). Each state has their own way of doing this but they are basically the same. And it’s a short easy form they have you fill out. There are currently a few states that have no personal income taxes: So let me see if I can name them off the top of my head: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. How do I know this? Because I have looked into moving to these states. If you live there, I only have one thing to say to you, congratulations! It’s like winning a lottery not having to pay personal income tax. You not only save money but you have less paperwork that you’ll need to file. Lucky stinkers! A couple of those states like New Hampshire still tax on interest and dividends. However, please note, this also depends on your business’s structure as you may have to pay corporate income tax instead and as far as I know only Wyoming and South Dakota don’t charge corporate or personal income tax. Speaking of business structure, if you are a sole proprietor and have no employees and need no special permits you won’t have to file for a federal or state tax ID because you can report your business on your personal tax statement. However, sometimes sole proprietors want to apply for their state EIN as this can provide another layer of protection from identity theft. After you have your state and federal ID’s it’s time to apply for any special permits or licenses you may need. For instance, my state needs special permits if you sell alcohol, guns, live animals, explosives, hazardous waste, commercial fishing, mining and drilling, or operating oversize vehicles. If you. There are bonding requirements for instance if you are a building contractor you need special bonding permits. are putting up a sign in your front yard with your business logo on it, you also need a special permit. These permits may be a pain but there are reasons behind them. For instance, when I applied for my sign permit I was only allowed so many sq feet per how big my building was that the sign was located on. It also had to be at a certain height. And if it was freestanding there was landscaping requirements for under it. Can you imagine if we could put any size on the building instead of making your community look good, everything may look trashy and junky like graffiti and garbage. Because there would be so many signs and there would be no cohesiveness to them. There are licenses to make sure businesses have the proper competent people running them for example if you do manicures, you need to prove you had proper training in learning how to do nails. If just anyone did your nails, you wouldn’t be guaranteed that the person knows how to sterilize their equipment and if the nail technician accidentally cut someone with their nail clipper and left blood on that clipper, then used it on the next person, who knows what type of disease you would get. Permits also ensure people are responsible for the use of natural resources. So there are a number of reasons for obtaining permits and most of them are very logical. There is also one more necessary State ID you’ll need if you carry products that the state requires you to charge tax on and that is your sales tax ID. Some states use the Federal EIN numbers as their Sales tax ID but this varies by state. My home state of MN has a separate number you need to apply for and you use this number at the top of your form when you send in the sales tax you collected for the government. You’ll have to go back to your State’s website to see if you’ll need a separate sales tax ID number. Sometimes they call this a ‘resale certificate’, ‘sales tax exempt number’ or a ‘sellers permit’. Just keep searching your state’s website under any of these names to get to the proper page for applying for your sales tax ID. Yes, if you sell products chances are you will need to collect the governments sales taxes on these products and then report to the government and hand over that which you collected. All in all, it’s important that pay on time – what you collect for the government to the government. Because if you don’t the government can go right into your business bank account and take that which is owed to them. And sometimes they even go into your personal bank account. Therefore, keep your records accurate and up to date. I highly recommend investing in a proper computer program designed for your type of business. Once you get behind in taxes, the fines can really start to mount up and can overwhelm you. Take for instance, the company Cultural Brokerage Agency *1 (also known as Brother Vellies) that was formed by Designer Aurora James. You may remember she was made famous when Representative Alexandria Ocassio-Cortez (AOC for Short) wore her dress to the Met gala stating “Tax the Rich”. James’ company had 15+ tax warrants in NY state for not withholding income taxes from employees’ paychecks. Just a reminder, when you are an employer, if you forget or just don’t withhold income taxes from an employee, you then have to pay 100% of that which was not withheld out of your own pocket. The government expects the employer to withhold collects federal and state income tax from their employees, to pass onto the government. Some employers even take the income tax out of their employees paycheck, then forget to pay it to the government. In other words, they forgot that it was not theirs to keep, it was the employees wage and they need that put into their employee’s social security fund so that employee can collect social security upon their retirement. In 2018 and 2019, the IRS placed 6 federal liens on the Cultural Brokerage Agency totaling over $103,000. And this isn’t only for businesses in the USA, fashion designers Dolce and Gabbana were found guilty of evading taxes amounting to around $227 million dollars $200 million euro, they were sentenced to 1.5 years in jail however, they appealed and the verdict was overturned. Although they may have won their lawsuit, it tainted their name and reputation and they still lost having to pay exorbitant legal fees. One last lesson, pay your taxes on time so you are not penalized or prosecuted. So that ends this podcast. The next podcast we will touch on step number 7 in running your business and that is finding the perfect location for your business. ———— Cited: *1- https://nypost.com/2021/09/18/aocs-tax-the-rich-dress-designer-aurora-james-is-a-tax-deadbeat/?fbclid=IwAR3tl0HEnKu6rodIIp7lzIoNF6HmRu1L9VOASg-Y632JTfxx2br_fvKWN4w 2*- https://www.theguardian.com/world/2014/oct/25/italian-court-overturns-dolce-and-gabbana-tax-convictions
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