Many wonder if a tax ID number for freelancers is a must. As self-employed individuals free from employer relationships, freelancers often question whether this is a requirement. While the obvious answer is YES, some freelancers tend to skip this process for several reasons. Others believe that their business is too small and personal, while others simply do not want to take time and go through the process. They think that filling out forms and spending time in long lines are too tedious.
As a freelancer, you have to understand that YOU ARE A BUSINESS. The mere fact that you are providing services or offering products for a fee categorizes you—even if you are a single entity, as a business. Your freelance business has an impact on the economy, no matter how small it is. And because of that, you have an obligation to your state or country. So yes, freelancers need a taxpayer’s identification number.
Getting a tax identification number should not be confused with securing a business license. As a freelancer, there are several factors to consider on whether you need a business license or not. But when it comes to a tax ID number, almost all states and countries require these from citizens and residents.
What is a Tax ID Number?
A tax ID number is a series of unique digits assigned to a taxpayer. The assigning body is a dedicated agency from the state or country of residence if you are an individual or the assigning body from where you operate your business. A tax ID is issued to individuals and all types of businesses for tax collection and administration purposes. Basically, if you are earning, you must secure a tax ID number.
In some countries, there are different types of tax ID numbers. In the United States, for example, the Internal Revenue Service (IRS) and the Social Security Administration (SSA) assign different types of tax ID numbers like the Social Security Number, Employer Identification Number, and Individual Taxpayer Identification Number, among others. These numbers are assigned for different types of entities, reasons, and purposes.
The tax ID number also makes it easy to identify an individual or business, as no two tax ID numbers are alike.
Importance of Tax ID Number for Freelancers
The primary use of a tax ID number (TIN) is for filing income tax returns. Tax ID numbers help countries track citizens’ income and other tax compliance through their internal revenue affairs department. Tax ID numbers are a good way to check a person’s credibility or a business’ legitimacy since compliance is reflected through these numbers. Your records will show that you are in good standing with the tax laws of the country you are working in, which also means that you are a competent business.
Some countries also require a tax ID number when opening bank accounts and credit lines. Or when applying for a job or buying and renting properties. Many countries also use tax ID numbers when providing government benefits and services.
So think about it, as a freelancer, if you have a tax ID number (and pay your taxes correctly and promptly), there are a lot of benefits.
Benefits to Freelancers:
- Confirms Legitimacy. Some clients are a little too vigilant when it comes to hiring freelancers. A tax ID number confirms that you are a registered taxpayer, and that makes a client more confident in hiring you. It shows you are a real and serious freelancer providing authentic and legitimate service or product.
- Matches Compliance with Client. In some cases, clients require freelancers to have tax ID numbers in order to file necessary taxes associated with hiring them. So, it is definitely a smart move to come into the freelance world prepared and ready by having a tax ID number.
- Government Benefits. Most countries provide medical benefits, insurance, and financial aid to compliant taxpayers. You also get to enjoy social security benefits along with your declared dependent.
- Identity. Tax ID numbers are unique. It serves as an extension of your personal and business identification. So, when it comes to tax season, you can easily file and refer to your records using your TIN.
- Future-Proofing. It will be advantageous if you have secured a tax ID number since the beginning of your freelance career. When you decide to expand your business or shift to a different business structure, it will be easier since you already have records with the internal revenue agency.
- Taxes. As a freelancer, you should not neglect your legal obligations. Being able to pay the proper taxes will not only save you from penalties from the government but also prove that you are handling a good and stable business. Keep in mind that in almost all countries, as long as you are receiving income, you are obliged to file your tax returns. Plus, there are some tax-related documents in your country that might need a tax ID number.
Getting a Tax ID Number
Thanks to the IT geniuses of this generation, getting a tax ID number now is easy. Tax collection and administration agencies of each country have made it more convenient to get tax ID numbers. For instance, in the U.S., the IRS has already included links for forms and guidelines on its website. So you now have to simply fill out online forms.
Keep in mind that documentary requirements are needed for different types of tax ID numbers, along with a completely filled-out form. Universally required documents include those that prove your identity and business issued by an authorized body.
Since tax ID numbers are unique, keep in mind that when you decide to change your business structure, say from a sole proprietorship to a partnership, you will need to get a new TIN.
To be extra safe, visit the internal revenue agency of the country of your residence or business location. Check out relevant websites too, like the U.S. Small Business Administration, for advice and tips.
Aside from the benefits, you will get from the government for having a tax identification number—and of course, paying the proper taxes, you must give emphasis on how this can help you with your freelance business.
Tax identification numbers are required for those who are earning either through self-employment or traditional employment. In conclusion, the tax ID number for freelancers is a must.
Get Organized & Win More Clients
Kosmo has everything you need to run your freelancing business.