Key Takeaways

  • LLC payroll covers both employee wages and, if elected, the owner’s salary when taxed as a corporation.
  • Single-member LLCs are considered “disregarded entities” by default and usually take owner draws instead of salaries.
  • Electing S-corp or C-corp taxation allows owners to receive a salary and deduct it as a business expense.
  • All employee wages must be “reasonable,” subject to payroll taxes, and properly reported on W-2 forms.
  • Using payroll software and following IRS reporting rules helps avoid penalties and ensures compliance.

A single member LLC payroll includes any employees your business has hired. You may also deduct your own salary from the company's earnings if you choose to be taxed as a corporation or LLC.

Deducting a Salary for a Single-Owner LLC

Single member LLCs are a unique crossover between LLCs and a sole proprietorship. They afford the owner the limited liability protection of an LLC, but with the option to pay taxes as a sole proprietor would. When you operate your business as an LLC, this will affect your ability to be a salaried employee that deducts their salary from company earnings. As a single member LLC, you can pay your taxes as a corporation or a sole proprietorship. With either of these methods, you can deduct salaries paid to employees.

Owner Draw vs. Salary: Choosing the Right Method

A crucial decision for single-member LLC owners is whether to take an owner’s draw or receive a salary. As a default, most owners pay themselves through draws—transferring profits from the business account into their personal account. These draws aren’t subject to withholding taxes at the time of payment but must still be reported as income and are subject to self-employment tax when you file your return.

If your LLC has elected to be taxed as an S corporation or C corporation, you can instead pay yourself a salary as an employee. This means you’ll receive regular paychecks with income tax, Social Security, and Medicare withheld, and the business can deduct your salary as an expense. Many owners opt for a combination approach: a “reasonable salary” plus additional profit distributions, which can reduce self-employment tax liability

Sole Proprietor Designation

Sole proprietorship is the automatic designation a single member LLC receives from the IRS. If you file taxes as a sole proprietor, you report all business income and losses on your personal tax return. This can be done on a Schedule C or a Schedule C-EZ. Wages are reported on Schedule C as employee expenses. You may also deduct payroll taxes on this form. Let the IRS know your company's structure, including the number of employees you have.

If you receive a W-2 from your LLC, you can report this income under "wages & income" on your tax return. If you pay estimated taxes, enter them under deductions & credits in the "federal estimated taxes, by quarter" section.

Remaining LLC earnings or losses go on your personal tax return. These numbers are reported on the same return as any other income sources you have outside of your business. If you take profits from an LLC, you cannot deduct these on your personal tax return as a salary.

SMLLCs that have employees can report employment taxes in two ways:

  • Report them under the SSN of the company's owner
  • Report them using the LLC's EIN

A single member LLC does not need an EIN if it chooses to be taxed as a disregarded entity, as long as it does not have any employees or excise tax liability. In this case, the company can use the federal tax ID number of the owner to report its taxes. When employment taxes are paid and reported using the company's EIN, it still falls on the owner to ultimately verify and pay all taxes regarding the entity.

Payroll Requirements for Employees

Even if you are taxed as a sole proprietor, hiring employees means you must handle standard payroll obligations. This includes:

  • Withholding and remitting federal income tax, Social Security, and Medicare taxes from employee wages.
  • Paying the employer’s share of FICA taxes.
  • Registering for a state employer account number and complying with state withholding and unemployment insurance rules.
  • Filing Form 941 (quarterly federal tax return) and Form W-2 for each employee annually.

It’s also essential to keep accurate records of hours, wages, and tax withholdings. Using payroll software or outsourcing payroll services can help ensure compliance and reduce the risk of IRS penalties.

Electing Corporate Tax

You can use form 8832 to pay taxes as a corporation instead of an LLC or sole proprietor. When being taxed as a corporation, you can pay yourself a salary and deduct it from your corporate tax return.

Corporations are classed as separate taxpayers by the IRS. So, company income does not go on your personal tax return. You will file a corporate tax return, which is done on form 1120 or 1120A. While a salary deduction sounds beneficial, its merits are often outweighed by the penalty of double corporate taxation. The salary you pay yourself will be reported and taxed on your personal tax return.

S Corporation Tax Election and “Reasonable Salary”

When a single-member LLC elects to be treated as an S corporation, the IRS requires the owner to pay themselves a “reasonable salary” for the work performed before taking profit distributions. This salary must align with what someone in a similar role would earn in your industry and region.

This structure can offer tax advantages because salary is subject to payroll taxes, but distributions are not. However, paying yourself too little may raise red flags with the IRS and trigger an audit. A CPA or payroll specialist can help determine an appropriate salary level.

Employee Salaries

Employee salaries may always be deducted, no matter how you choose to be taxed. Salaries can only be given in exchange for services performed for the company. The salaries must be reasonable for the tasks performed and expertise required. Unfortunately, there are no hard and fast rules about when a salary is "reasonable". Hours worked per year, amount of responsibility, and skill level required are a few good ways to evaluate a job's target salary.

Payroll Systems and Compliance Tips

Proper payroll management is essential for compliance and smooth business operations. Consider the following best practices:

  • Use payroll software: Automates tax calculations, filing deadlines, and W-2 generation.
  • Maintain separate accounts: Keep business and personal finances distinct to simplify payroll tracking and tax reporting.
  • Stay current with tax law changes: Federal and state payroll tax rules can change yearly.
  • Plan for cash flow: Ensure sufficient funds are available for tax payments and employee wages.
  • File and pay on time: Late payroll tax payments can result in substantial IRS penalties and interest.

How to Deduct

When you are the only member of an LLC, paying yourself is as simple as writing a check in the business' name or making an electronic transfer of funds to your personal account. You can deduct employee salaries as a sole proprietor by calculating the yearly total and reporting it in the expense area of your personal tax return. This serves to reduce your taxable income. On Form 1120 for corporations, you may enter the total amount for all salaries paid, including your own salary, on the "salaries and wages" line.

Tax Reporting and Recordkeeping for LLC Payroll

Accurate payroll reporting is not just a legal requirement — it’s critical for managing your LLC’s financial health. Maintain detailed payroll records, including:

  • Employee names, Social Security numbers, and addresses.
  • Gross pay, deductions, and net pay for each pay period.
  • Tax deposits and filed returns.

You’ll also need to report payroll activity annually on forms such as W-2 (for employees) and W-3 (transmittal form). If you’re paying yourself a salary as a corporation, report your wages just like any other employee. Consistent, accurate reporting can help avoid IRS scrutiny and simplify audits.

Frequently Asked Questions

  1. Do I have to run payroll for myself as a single-member LLC?
    Not if you’re taxed as a sole proprietor — you can simply take owner draws. But if you elect S-corp or C-corp status, you must pay yourself a salary and run payroll.
  2. How do I know what a “reasonable salary” is for my LLC?
    It should reflect what someone in your position would earn for similar work in your industry and region. Consulting a tax professional is recommended.
  3. Can I deduct payroll expenses on my taxes?
    Yes. Employee wages, payroll taxes, and your own salary (if taxed as a corporation) are deductible business expenses.
  4. What happens if I don’t withhold payroll taxes?
    Failing to withhold or remit payroll taxes can result in severe IRS penalties, interest charges, and possible legal action.
  5. Do owner draws affect self-employment tax?
    Yes. All owner draws are subject to self-employment tax when you file your personal return, even though taxes aren’t withheld when the draw is taken.

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