Often referred to as a tax ID number, the tax identification number is a numerical designation that is assigned to a business entity operating within a given locality. The main purpose of tax IDs is to quickly identify the entity for purposes of associating tax withholding and payments to the business. In addition, many companies make use of the tax identification numbers of vendors as one aspect of their internal accounting procedures.
The tax identification number in many ways serves the same purposes as a Social Security number do for an individual. The number makes it possible to associate all relevant tax and income data to a specific entity, and ensure that from the perspective of taxation all remains in order. In many countries around the world, a tax identification number is necessary before the company can operate within the country legitimately.
Part of the process of setting up a business entity involves applying for and receiving a tax identification number. Often, this is seen as a step that is taken just before or just after the official incorporation of the business. Some countries require that a company have a tax identification number before incorporation takes places. Others allow the incorporation to occur, with the understanding that the tax identification number will be applied for and added to the incorporation within a specified period of time.
It is not unusual for individuals operating a home business to apply for a tax identification number, rather than simply using the personal Social Security number. In one sense, this is an excellent way to keep personal and professional finances separate. However, individuals who freelance may not wish to be incorporated and thus do not necessarily need a tax identification number in order to file or pay taxes.
The issued tax identification number remains the property of the issuing government agency, and can be revoked if it is determined that the company is not operating within the terms and conditions that apply to the extension of the ID number. Many businesses will not work with vendors who are unable to supply a valid tax identification number, since the implication is that the vendor may not be operating within the legal perimeters necessary.