LLC Payroll 101

LLC payroll basics: W-2s, payroll taxes, and when an LLC must run payroll for owners and employees.

Running LLC payroll can feel intimidating, but the fundamentals are straightforward. Payroll is how you pay employees and, in an S-corp, yourself, with the right taxes withheld and reported. Understanding when payroll is required and what it involves keeps you compliant and avoids penalties. Here is what owners and employees need to know.

When an LLC Must Run Payroll

You generally must run payroll whenever your LLC has employees or is taxed as an S-corp. In a default LLC, owners who take draws are not employees and do not need payroll, but once you hire workers you must run payroll and withhold payroll taxes. In an S-corp, the owner must be paid a reasonable salary through payroll. Whether you have employees or elect S-corp status, payroll is mandatory once it applies. See our LLC vs S-corp page for how that election changes your obligations.

The LLC Payroll Tax Basics

Payroll involves withholding and paying several taxes. You withhold federal income tax, Social Security, and Medicare from each employee's paycheck, and you also pay the employer share of Social Security and Medicare. On top of that, you handle federal unemployment tax and any state payroll taxes. These amounts must be deposited on a schedule set by the IRS, typically based on how much you owe. Getting these right requires an accurate setup from the start.

W-2s and Year-End Reporting

At the end of the year, you provide each employee a W-2 that summarizes their wages and withheld taxes, and you file copies with the Social Security Administration. You also file quarterly payroll tax returns during the year. Keeping accurate records of every paycheck and tax deposit makes year-end reporting simple. If you pay independent contractors, those payments are reported on 1099s instead, which is a separate process.

How to Run LLC Payroll

You can run payroll yourself using the IRS and state systems, but most small businesses use payroll software or a payroll service. A good provider handles calculations, tax deposits, and filings, which dramatically reduces the risk of mistakes. Whichever route you choose, you need an EIN number, a payroll schedule, and accurate employee information including W-4s. Decide on a pay frequency and stick to it.

Common Payroll Mistakes to Avoid

The most common errors are missing deposit deadlines, misclassifying workers, and paying an S-corp owner too little salary. Worker misclassification, treating an employee as an independent contractor, can lead to back taxes and penalties. And the IRS expects S-corp owners to take a reasonable salary rather than avoiding payroll tax on distributions. For the tax side of running payroll correctly, review our LLC taxes page.

Payroll for Single-Member LLCs

If you are the only owner and your LLC is not an S-corp, you do not run payroll for yourself. You take draws and pay self-employment tax on your profit instead. That changes the moment you hire anyone or elect S-corp status. Many single-member owners are surprised to learn they can skip payroll entirely until they add employees. Keep that in mind when you plan your first hire, because payroll setup takes time and should be in place before the first paycheck.

Frequently Asked Questions

When does an LLC need to run payroll?

An LLC must run payroll when it has employees or is taxed as an S-corp. In a default LLC, owners who take draws are not employees and do not need payroll, but hiring workers triggers the requirement to withhold and pay payroll taxes. In an S-corp, the owner must be paid a reasonable salary through payroll, with W-2 wages and payroll taxes withheld. Once payroll applies, you are responsible for calculating wages, withholding taxes, depositing them on schedule, and filing the required returns. Setting it up correctly from the start avoids penalties later.

Do LLC owners have to pay themselves a salary?

Only if the LLC elects S-corp status. In that case the owner must be paid a reasonable salary through payroll, and the IRS expects that salary to reflect the work the owner actually performs. In a default LLC, owners take draws and are not employees, so no payroll salary is required. That is one of the key differences between the two structures. If you are an S-corp owner, you cannot simply take all of your profit as distributions and skip the salary, because the IRS watches for owners who underpay themselves to avoid payroll tax.

What taxes are withheld from an employee's paycheck?

Federal income tax, Social Security, and Medicare are withheld from each employee's paycheck, and the employer pays its own share of Social Security and Medicare on top of that. The employer also handles federal unemployment tax and any state payroll taxes that apply. The amounts depend on the employee's W-4, their wages, and the tax rates in effect. These taxes must be deposited on a schedule set by the IRS, typically based on how much you owe. Getting the withholding and deposit schedule right is essential to staying compliant.

Should I run payroll myself or use a service?

Payroll software or a payroll service reduces errors in calculations, tax deposits, and filings, which is why most small businesses use one. A good provider handles the math, reminds you of deadlines, and files the required returns, which dramatically lowers the risk of mistakes. Running payroll yourself is possible using the IRS and state systems, but it requires care and accuracy, and errors can be costly. Consider the number of employees you have and how much time you want to spend. For most owners, the cost of a service is worth the peace of mind.