When do I need a state tax ID number?

If you are self-employed, most taxing authorities, including the IRS consider you and your business as one inseparable taxpayer.  There are however, certain times when operating your business will require you to have a state tax id number, even if one may not be required by the Internal Revenue Service.  Here are some of the more common reasons that you will need to obtain a state tax id.

  1. You collect and pay sales tax or qualify to purchase items tax free. If you are selling tangible goods to consumers or businesses, in most states you are also required to charge sales tax on the items you sell.  Your state will require you to apply for a sales tax permit and will assign you a state tax id number.  In most cases a sales tax permit will also allow you to buy items tax free when you intend to resell them. (Sales tax taxing your brain? Find out more about Outright.com’s new and improved sales tax tracking!)
  2. You have employees. Every state has some form of unemployment tax and many states also require you to withhold state income tax from employee’s pay.  If you intend to hire employees, you will need to obtain a tax id number in order to set up an employer tax account with your state.
  3. You operate your business as an LLC. If you are the sole owner of an LLC, the IRS does not require you to have a separate tax id number or even file a separate tax return, but most states will see your LLC as a separate tax entity.  Most states will require you to have a state tax id for the LLC, so you can file a separate franchise tax return with the state.

Just having a tax id number from the IRS is not always enough.  If you have questions about your individual state and tax id requirements, you may want to contact the taxing or revenue agency for your state.  Most states have a website where you can obtain a tax id number online.

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