The Difference Between Federal and State Tax IDs

To file taxes and perform a range of tasks, a tax ID is necessary. The confusing aspect of tax ID is when a business owner is caught between the two available options; to get a federal or state tax ID. To clear the confusion, an understanding of how tax ID functions and the purpose of federal and state tax ID will suffice.

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What is a Federal Tax ID?

Referred to as employer identification number (EIN) or federal employer identification number (FEIN), the federal tax ID number is needed to file income tax at the federal level, to apply for and get business licenses and permits, to employ and set up a business bank account.

Since federal tax laws differ from that of the state, two tax IDs are necessary; one for federal tax and another to pay state taxes. 

Who needs a Federal Tax ID?

Since every business must pay income tax to the federal government, a federal tax ID is mandatory. There are other factors to why one needs a federal tax ID; If your business pays employees, operates as a corporation or partnership, files tax returns for employment, withholds taxes on earnings, offers a tax-deferred pension plan, or offers a tax-exempt pension plan like a Keogh Plan, you will need a federal tax ID. Unless you run a small business as a sole proprietor or single-member LLC, a federal tax ID is important. Even if you reside in one of the seven states where state tax doesn't apply, you'll still need to file federal tax. The seven states with no income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. If you are in need of a federal tax ID, you can simply apply on the IRS website. 

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How to Register for a Federal Tax ID / EIN

Federal tax ID is easy to apply for either online or on paper. Simply fill out the SS-4 form provided by the Internal Revenue Service (IRS). You can fill and submit this online by following the prompt to enter your basic information and more. The offline option entails a download of the SS-4 form, filling in the details, and submitting it as directed. The process is simple and free.

What is a State Tax ID?

If you are guessing that a state ID is simply the state version of the federal type, then you're correct. The state ID performs the same function but at the state level.

A state tax ID number is unique to each business and serves as an identification to file taxes. Additionally, within the state, certain permits and licenses make state tax ID important to acquire.

Although similar to the federal tax ID, the state tax ID is required to file not just state taxes which are different from federal taxes but to also hire and pay employees within the state. There are eight states that have no income tax, those states determine figures based on their specific business structure. 

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Who needs a State Tax ID?

Unless the business is a proprietorship or single-member LLC, you must get a State Tax ID.

These entities are exempted from taxes because they don't have employees and the business owner pays the business tax through personal income tax. And unless an LLC employs, an SSN is enough identification to file tax for the business through personal income tax.

Every other form of the business entity must get a State Tax ID to be operational.

How to Register for a State Tax ID

The process to register for a State Tax ID is unique for each state, which means you have to see what applies in your state. Check out the online site of the state, use a search engine, or check the IRS website for relevant information.

Using Both State and Federal Tax IDs

Both Federal and State Tax IDs are used in many states due to double taxation of income at the federal and state levels. Each of these systems operates on different budgets and hence requires you to pay separate taxes.

Unfortunately, there's no option to pay just federal tax and leave out that of the state. If you live in a state that taxes businesses separate from the federal government, both business taxes must be paid. If you avoid or forget to pay both your federal and state tax can come with consequences. So keep in mind that these are important to file to the IRS.

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Federal Tax ID vs State Tax ID

While federal and state tax IDs may share few similarities, their purpose varies. Federal tax ID is a must for any business except sole proprietorship or single-member LLC. Even if your business entity is not required to pay state tax, federal tax is a must.

State tax ID is also a requirement for paying state taxes and performing other business-related activities. Find out what the regulations are for your state to avoid missing any tax payments and most importantly to prevent floating rules that may affect the business in the future.