Key Takeaways

  • LLCs must properly classify workers and obtain an EIN before processing payroll.
  • Setting up payroll involves choosing a payroll schedule, tracking time, calculating pay, and complying with tax laws.
  • Owners should understand how to pay themselves—via draw or salary—depending on LLC structure and tax election.
  • Payroll software or outsourcing can reduce errors and save time.
  • Keeping thorough records is essential for tax compliance and audits.
  • Single-member LLCs with employees still need to adhere to payroll tax requirements.
  • You can consult a lawyer through UpCounsel for help setting up payroll and complying with federal and state laws.

LLC payroll taxes are those taxes paid if you have employees working for your LLC. An LLC, also referred to as a Limited Liability Company, consists of members who are in charge of the business.

Since the Internal Revenue Service (IRS) doesn’t recognize LLCs, the member(s) of the LLC must elect to be taxed as a sole proprietorship (single-member LLC), partnership (multi-member LLC) or corporation (single or multi-member LLC). If the single-member LLC doesn’t elect to be taxed as one of these business structures, then the IRS automatically taxes the LLC as a sole proprietorship. Similarly, those multi-member LLCs that fail to make the appropriate election will be taxed as a partnership.

LLCs are considered pass-through entities, as the profits and losses of the company are passed on to the members who report it on their personal tax returns. Therefore, the LLC itself does not pay federal income taxes.

LLC Taxes

As previously noted, the LLC does not pay federal income taxes; rather, the members report all income from the LLC on their own personal tax returns. Generally, LLCs are in fact taxed as sole proprietorships (also referred to as disregarded entities) in which the profits/losses are reported on Schedule C of Form 1040 for those members of the LLC. The profits and losses are added in with the member’s other income in order to determine what tax is owed, or alternatively, how much money is to be reimbursed to the member.

By default, multi-member LLCs are taxed as partnerships. The LLC will file an information return with the IRS, and thereafter, each member will file Schedule K-1 on his or her individual tax returns to identify the percentage of profits/losses that each member is responsible for.

Any LLC (single or multi-member) can also elect to be taxed as a corporation. This is generally done if there is some sort of tax advantage to the member(s) and company if choosing to file taxes as a corporation. If this is the case, the LLC will submit Form 8832 (Entity Classification Election).

Regardless of the type of business structure elected for tax purposes, LLC members are self-employed rather than employees of the LLC and must pay self-employment taxes based on the share of their income. This self-employment tax is included on the member’s Form 1040 and is calculated utilizing Schedule SE.

LLC with Employees

If the LLC has employees, the business has additional taxes to pay, including:

  • Employment taxes
  • Withhold and report both federal and state income taxes
  • Pay and report FICA taxes, i.e., Social Security and Medicare
  • Workers’ compensation taxes
  • Unemployment taxes

Steps to Set Up Payroll for an LLC

When learning how to set up payroll for an LLC, it's critical to follow a structured approach to ensure tax compliance and smooth operations. Below are the essential steps LLCs should follow:

  1. Classify Workers Correctly
    Determine whether the individuals working for your LLC are employees or independent contractors. Misclassification can lead to penalties.
  2. Obtain an EIN (if not already acquired)
    You’ll need an Employer Identification Number (EIN) from the IRS to report payroll taxes and issue tax documents.
  3. Register With State and Local Tax Agencies
    You may need to register your LLC for state income tax withholding, unemployment insurance, or local business taxes depending on your state.
  4. Choose a Payroll Schedule
    Decide how often employees will be paid (e.g., weekly, bi-weekly, semi-monthly) and ensure it complies with state laws.
  5. Collect Employee Tax Information
    Collect and store completed W-4 forms for employees and I-9 forms for employment eligibility verification.
  6. Track Employee Time Accurately
    Use reliable time-tracking software or manual methods to calculate hours and manage overtime.
  7. Calculate Gross Pay and Withhold Taxes
    Determine each employee’s gross pay, then calculate and withhold federal income tax, FICA taxes (Social Security and Medicare), and any applicable state or local taxes.
  8. Submit Payroll Taxes
    Deposit withheld taxes with the IRS and file Form 941 quarterly. Also submit unemployment tax payments and other state filings as required.
  9. Distribute Paychecks and Maintain Records
    Provide pay stubs detailing deductions and earnings. Keep payroll records for at least four years.
  10. Issue Year-End Tax Forms
    Send Form W-2 to employees and file copies with the SSA. Issue Form 1099-NEC to contractors paid $600 or more.

State Payroll Requirements and Compliance

Each state has its own set of rules regarding payroll taxes, new hire reporting, and wage requirements. Some key state-level requirements may include:

  • Registering for state income tax withholding
  • Enrolling in the state’s unemployment insurance program
  • Posting required workplace notices
  • Providing final paychecks within state-mandated timeframes
  • Meeting minimum wage and overtime laws

LLC owners should regularly check with their state’s Department of Labor or revenue agency to ensure they are meeting all legal obligations.

Property Taxes for an LLC

If the LLC owns property, then property taxes must be paid on that property. Sales and excise tax are also required. With regard to franchise taxes, LLCs are generally not responsible for this type of tax, as most states require corporations to pay such tax.

Obtaining an EIN for Payroll Taxes

An EIN, known as an Employer Identification Number, is the business identification number that is used for federal tax purposes. It is provided by the IRS and is used to pay employment taxes, as well as open a business bank account. Furthermore, some financial institutions require businesses to show proof of an EIN before doing business with the LLC.

Some LLCs might not need an EIN. For example, if the LLC is a single-member LLC with no employees, it might not be necessary for that member to obtain an LLC. However, if the member hires employees, then an EIN will likely be required. If a single-member LLC does, in fact, have employees, the business has two ways in which to report and pay employment taxes:

  • Use the name and EIN given to the LLC
  • Use the name and social security number of the member

While the member can try using his or her personal SSN, the IRS might likely contact the member requiring that he or she obtain an EIN for tax purposes, particularly if the LLC has several employees. Further, obtaining an EIN in this case can prevent future disputes or legal issues.

How to Pay Yourself as an LLC Owner

One of the most common questions for LLC owners is how to legally pay themselves. The method depends on how your LLC is taxed:

  • Single-Member LLC (Disregarded Entity):
    Owners generally take an "owner’s draw," transferring funds from the business bank account to their personal account. No payroll taxes are withheld, but the owner pays self-employment taxes when filing their personal return.
  • Multi-Member LLC (Partnership):
    Members also take draws based on their ownership percentage. Each member receives a Schedule K-1 for tax reporting. Again, self-employment taxes apply.
  • LLC Taxed as an S Corporation or C Corporation:
    In this case, the owner is considered an employee and must be paid a "reasonable salary." This means running payroll, withholding taxes, and issuing a W-2 form at year-end. The owner may also take distributions, which may not be subject to self-employment tax.

Tip: Avoid paying yourself through payroll unless the LLC is taxed as a corporation. Doing so incorrectly can trigger red flags with the IRS.

Payroll Software and Outsourcing Options

LLC owners can handle payroll manually, but using software or outsourcing to a payroll service provider reduces the risk of errors and ensures compliance with tax deadlines.

Popular Payroll Solutions Include:

  • Gusto
  • QuickBooks Payroll
  • ADP
  • Paychex

These platforms can automate:

  • Employee pay calculations
  • Tax withholding and payments
  • Direct deposit
  • Year-end tax form generation

Outsourcing Payroll May Be Ideal If:

  • Your LLC has multiple employees
  • You’re unfamiliar with tax laws
  • You prefer to delegate payroll tasks to focus on growth

Frequently Asked Questions

1. How do I set up payroll for an LLC with no employees? If you're the only member and have no employees, you typically don’t run payroll but instead take an owner’s draw. Payroll setup is needed only if you hire staff or elect corporate taxation.

2. Can I pay myself a salary from my LLC? Yes, but only if your LLC is taxed as an S Corp or C Corp. Otherwise, you take distributions or draws.

3. Do I need payroll software for my LLC? It’s not required but highly recommended. Payroll software simplifies tax calculations, ensures compliance, and automates reporting.

4. What taxes do I need to withhold from employees? You must withhold federal income tax, Social Security, Medicare (FICA), and possibly state/local taxes. You’ll also pay employer portions of FICA and unemployment taxes.

5. When is payroll due to the IRS? Deposits are generally due either monthly or semi-weekly depending on your payroll size, and Form 941 must be filed quarterly.

If you need help learning more about LLC payroll taxes, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.