In my experience, clients who I've done contract work for haven't asked for this until the end of the fiscal year, when their accountant starts pressing them to get their taxes in order.
My experience comes from dealing with small startups, where there's not a lot of process in place. The mutual trust came from the fact that they already paid me hundreds or thousands of dollars in exchange for the work I've done.
When they asked for my tax id, I didn't give it a second thought.
Now, if you're doing work for a larger client, they may very well want your tax id in advance. In the United States, you can go to the IRS Website and apply for an EIN Federal Tax ID, which means you don't have to give your personal social security number to clients who contract with you.
If that's not an option, just do some basic research on the client. If they're well-established, they likely have a website, some reviews, public artifacts on the Internet that verify that they exist and are indeed legitimate. If something doesn't feel right, move on and find another client.
As far as what to do if a potential client asks for your tax id before you start work, here are a couple things you can do to protect yourself:
If a representative from the company asks for this information, tell the representative that the EIN (or tax ID) will be included on your first invoice you send to them and that this is your preferred method for transmitting this information. If this satisfies both parties, move on.
If the representative prefers that you send this information before you start working, try to include the EIN or tax ID in your contract. In the LegalZoom article titled, "Hiring Independent Contractors", LegalZoom suggests businesses note the contractor's business name and tax id in the actual contract:
A written contract. Outline the nature of the relationship since merely saying the person is an independent contractor doesn’t make it so. Indicate the project’s expected results, fee and date(s) of completion. The contract should state the worker should use his/her own equipment/tools, is free to hire others without your approval, and that he or she provides liability insurance for his/her workers. Note the contractor’s business and tax I.D. number. Make sure the contract is signed by both parties and create a new contract for each new project.
Including it in the contract shows that you attempted to establish a business relationship with the other party, and will leave a paper trail for you to follow in cases of fraud.
- Lastly, keep in mind that one of the purposes of a Federal Employer Identification Number (EIN) is for fraud protection.
According to the Nolo Legal Encyclopedia, Does a sole proprietor need an EIN?, preventing identity theft is one reason for having an EIN:
...many sole proprietors still elect to use an EIN because it reduces the chances of identity theft and banks often require one to open a business account.
And according to LoopHoleWy's Tax Basics for Startups, using an EIN protects your personal identity if you pay independent contractors and must issue 1099-MISC forms. However, this works both ways, as someone receiving 1099-MISC forms from employers, using an EIN offers you the very same identity theft protections by not exposing your personal tax ID or social security number.
While I'm not familiar with tax laws in other countries, whether or not this applies in this case or not, for anyone interested in such identity theft protections in your own locale, check your local and federal laws to see if there exists business tax ID's which you can use to protect your own personal identity.
How to tell if a company is legitimate:
Of course, as I mentioned earlier, if the deal doesn't feel right, move on and find another client. Here are some things to look at to help determine whether or not a potential client is legitimate:
Do they have an up to date website that looks professional and modern? If not, what industry are they in? If they're in IT and don't have an up to date website, this may be a red flag.
Are there online reviews of the company from past or current employees, including contractors? If 90% of the reviews aren't positive, this may be a red flag. Specifically, look for negative reviews that indicate employees or contractors were treated poorly when it comes to financial compensation. A few bad reviews may be normal and may just be from people who were rightfully terminated or who simply like to complain, but a significant number of bad reviews is a red flag.
Does the business have a good reputation with other vendors and customers? If a business doesn't have a good rapport with its customers, this may also be a bad sign. If they don't treat their customers well, it's possible they don't treat vendors well, including contractors.
In summary, if something doesn't feel right, move on. But if you do move on, be sure to protect your personal information by using information specific to your business, and make sure you maintain a paper trail from the initial contract including all invoices.