A federal tax ID and a state tax ID do different jobs, and most businesses need both. The federal number, called an Employer Identification Number or EIN, is issued by the IRS and identifies your business for income tax, payroll tax, and any other federal filing. A state tax ID is issued by the revenue department of the state where you operate, and it covers state-level obligations like sales tax collection, state income tax withholding, and unemployment insurance. If you have employees or sell taxable goods, plan on registering at both levels from day one.
What the Federal EIN Covers
An EIN is a nine-digit number the IRS assigns to identify your business for federal tax purposes.1Legal Information Institute. Employer Identification Number (EIN) It functions like a Social Security number for the entity. The IRS uses it to track employment tax deposits, income tax filings, and anything else tied to the business rather than to you personally.
Corporations and partnerships must have one.1Legal Information Institute. Employer Identification Number (EIN) Sole proprietors can often use their personal SSN instead, and only need a separate EIN if they hire employees, maintain a Keogh retirement plan, or file pension or excise tax returns. A one-person operation with none of those triggers can file federally under an SSN.
The EIN reaches beyond taxes. Banks require one to open a business checking account.2U.S. Small Business Administration. Open a Business Bank Account It also stays with the entity for life. Move to another state and the EIN is unchanged. Close the business and the number is never reassigned or reused.3Internal Revenue Service. If You No Longer Need Your EIN
What the State Tax ID Covers
State tax IDs are issued by individual state revenue departments and cover a different set of obligations. The three most common are withholding state income tax from employee paychecks, remitting unemployment insurance contributions, and collecting sales tax at the point of sale. A state tax ID is valid only within the borders of the state that issued it, so operating in multiple states usually means registering in each one.
Unemployment insurance is the obligation new employers most often overlook. Every state requires businesses with employees to register for an unemployment tax account, and the state uses your industry classification code to set your initial rate.4U.S. Department of Labor. Unemployment Insurance Program Letter No. 08-22 The wrong code can mean overpaying for years before anyone catches it.
Sales tax registration is the other typical trigger. If you sell taxable goods or certain services, most states require you to register for a sales tax permit before you collect a dime. Operating without active registration can bring penalties, revocation of your right to do business in the state, and personal liability for uncollected taxes.
When You Need Both
The moment you hire your first employee, you almost certainly need both numbers. Federal law requires you to withhold federal income tax and pay into Social Security and Medicare. At the same time, the state where your employees work requires you to register for state income tax withholding and unemployment insurance. These are parallel obligations that trigger together.
Selling taxable products is the other common scenario. Your EIN identifies the business on federal returns, and the state sales tax permit, tied to your state tax ID, authorizes you to collect and remit sales tax. If your business also earns enough profit to owe state income tax, you’ll file state returns under your state ID alongside the federal return filed under your EIN.
The vast majority of businesses with employees or retail sales fall into this category. Exceptions exist, but they are narrow enough that most owners should plan on registering at both levels.
When One Is Enough
Not every business needs a state tax ID. Nine states impose no broad-based personal income tax, and five have no statewide sales tax. If you operate in a state with neither, and you have no employees, there may be no state account to register for. You would still need an EIN if the business is a corporation or partnership.
Going the other direction, a sole proprietor with no employees who sells only in a state with sales tax might need a state sales tax permit but skip the EIN entirely, using their SSN for federal filing. These setups are uncommon, but they exist. Paying a service to get an unnecessary EIN is wasted money in any case, because the IRS issues them for free.5Internal Revenue Service. Get an Employer Identification Number
Selling Across State Lines Adds More State IDs
Your single federal EIN stays the same no matter how many states you sell into. State registrations multiply. After the Supreme Court’s 2018 decision in South Dakota v. Wayfair, states can require out-of-state sellers to collect sales tax once they cross certain economic thresholds. The most common threshold is $100,000 in annual sales or 200 transactions in the state, though several states set the bar higher or measure the period differently.
Crossing that threshold means registering for a sales tax permit in that state, which creates a new state tax ID and a new set of filing obligations. An e-commerce business selling nationwide can trigger registration in a dozen states within its first year or two. Each registration is a separate account with its own deadlines, and missing one can result in penalties and back taxes calculated from the date you first exceeded the threshold, not the date you finally registered.
How to Get the Federal EIN
The IRS issues EINs at no cost. Never pay a third party for one; the IRS explicitly warns against sites that charge fees for this service.5Internal Revenue Service. Get an Employer Identification Number
The fastest method is the IRS online application, which generates the number immediately upon approval. The tool is available Monday through Friday from 6:00 a.m. to 1:00 a.m. Eastern, Saturdays 6:00 a.m. to 9:00 p.m., and Sundays 6:00 p.m. to midnight. You can also submit Form SS-4 by fax, which takes about a week, or by mail, which can take up to four weeks.5Internal Revenue Service. Get an Employer Identification Number
The online application is not available to applicants whose principal place of business is outside the United States. Foreign applicants must apply by phone, fax, or mail.6Internal Revenue Service. Instructions for Form SS-4
Before you start, gather the legal name of the entity as it appears in your formation documents, the physical business address, and the date operations began. You’ll also identify a “responsible party,” which must be a real person, not another business entity, and provide their SSN or ITIN.7Internal Revenue Service. Responsible Parties and Nominees
How to Get the State Tax ID
State registration is less standardized. Most states run an online portal through the department of revenue or secretary of state’s office where you can register for withholding, unemployment insurance, and a sales tax permit in a single session. Processing typically takes a few business days for electronic filings, longer for paper.
Most states charge no fee to register online for a sales tax permit or withholding account. A few states charge modest fees for paper applications or require security deposits in certain industries. You’ll provide much of the same information as on the federal application, plus your EIN. Many states also ask for your NAICS industry code, which sets your initial unemployment insurance tax rate.4U.S. Department of Labor. Unemployment Insurance Program Letter No. 08-22 Look up the correct code before you start. Fixing it later means contacting the state labor department and often waiting weeks.
What Skipping Registration Costs
The penalties are real. At the federal level, failing to file a return triggers a penalty of 5% of the unpaid tax for each month the return is late, up to a maximum of 25%. If a return is more than 60 days late, the minimum penalty for returns due after December 31, 2025 is the lesser of 100% of the tax owed or $525.8Internal Revenue Service. Failure to File Penalty
Partnership and S corporation returns have their own structure. For returns due after December 31, 2025, the penalty is $255 per partner or shareholder per month, up to 12 months.8Internal Revenue Service. Failure to File Penalty A five-member partnership that files three months late owes $3,825 in penalties before anyone looks at the underlying tax liability. “I didn’t know I needed to register” is not reasonable cause in the eyes of the IRS.
State penalties vary but often include back taxes plus interest from the date you should have registered, flat penalties for each unfiled return, and revocation of your authority to do business. Some states impose personal liability on officers or owners for uncollected sales tax, meaning the state can pursue personal assets for taxes you should have collected from customers.
One Federal Filing You Can Probably Skip
Registering a new business used to trigger a separate federal filing under the Corporate Transparency Act: a Beneficial Ownership Information report filed with FinCEN. As of March 2025, domestic companies are fully exempt. FinCEN revised its rules so that only entities formed under foreign law and registered to do business in a U.S. state must file BOI reports, and those entities must file within 30 calendar days of registration.9Federal Register. Beneficial Ownership Information Reporting Requirement; Revision and Deadline Extension If your business is formed domestically, this one is off your list.