How Does a Tax ID Number Work?
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The Internal Revenue Service (IRS) Tracks Tax Debts and Payments
Each person living and working in the United States incurs a tax debt. Moreover, each legal entity---such as a corporation or an estate---also incurs tax debts as a matter of doing daily business. The IRS keeps track of the debts and also any payments made toward these debts with the help of a uniquely assigned tax ID number.
Different Tax ID Numbers
The IRS currently recognizes five different types of tax ID numbers: social security numbers, individual taxpayer identification numbers, preparer taxpayer identification numbers, employer identification numbers, and a taxpayer identification number for adoptions not yet finalized.
Apply for a Social Security Number (SSN)
Social security numbers are issued at birth to United States citizens. If parents fail to apply for the number, or if you are a resident alien permitted to work in the United States, you may apply for a social security number through the Social Security Administration (see Resources below). When your application is approved, you receive a social security card with the number on it.
When You Will Need Your Social Security Number
When you are employed, you must give your employer your social security
number. He will report your earnings to the IRS. Use the number when you file your yearly tax return. This permits the IRS to track your tax payments and compare them to your tax indebtedness.
Individual Taxpayer Identification Number
An individual taxpayer identification number is reserved for foreigners residing in the United States who do not qualify to receive a SSN. You must apply to the IRS for this number (see Resources below).
Preparer Tax Identification Number
The preparer tax identification number (PTIN) is reserved for those individuals who make an income from preparing tax returns for other people. Since the tax forms ask for an ID number but most individual preparers shy away from revealing their SSNs, they may use the PTIN instead. In this case, the tax ID simply works as a tracking number to identify individual tax preparers, especially if there is a problem. Apply via the IRS website (see Resources below).
Eligibility for Employer Identification Number and Taxpayer Identification Number
Since there are certain tax liabilities associated with an employer identification number and also a taxpayer identification number for adoptions not yet finalized, it is a good idea to discuss your eligibility for them prior to applying with the IRS.Source: ehow.com