LLC Payroll: How to Set Up LLC Payroll & Rules for Paying Yourself
May 02, 2023
LLC Payroll: How to Set Up Payroll & Rules for Paying Yourself
Owning a limited liability company (LLC) can be a rewarding, profitable, and exciting business venture. But like opening any business, it comes with plenty of challenges to overcome. One of the biggest you’ll face as an LLC owner is setting up the payroll. It’s a vital part of a business to arrange how employees are going to be paid, as well as how you yourself are going to profit from the business. Let’s get into how you go about setting up payroll for your LLC, and we’ll also review details to consider when paying yourself.
LLC Payroll Basics
Setting up payroll for your LLC involves several steps. First, you must obtain an Employer Identification Number (EIN) from the IRS as well as any required state and local IDs. Next, you need to choose a payroll system, either manual or automated, and decide on a pay schedule for your employees. You and any business partners you have should also research and comply with state and federal employment laws, such as minimum wage and overtime requirements. Finally, you must register your LLC with the state's labor department and obtain workers' compensation insurance.
LLC Tax Deductions
Since you’re considering how to handle payroll, you’ve probably wondered about business taxes and deductions. The good news is you can deduct various payroll expenses on your taxes. These expenses may include salaries and wages paid to employees, employer-paid payroll taxes, such as Social Security and Medicare, state unemployment taxes, and employee benefits such as health insurance, retirement contributions, and paid time off. It's important for LLC owners like you to keep accurate records of payroll expenses and ensure you comply with all state and federal employment laws. Having a good accountant is so important to make sure you are taking advantage of any tax benefits regarding payroll in your business.
Payroll Laws Can Differ
You should know that LLC payroll regulations can vary significantly between states. Each state has its own laws regarding minimum wage, overtime pay, and payroll taxes. Some states require LLCs to provide certain benefits to employees, such as paid sick leave or family leave. Additionally, state laws may dictate how frequently payroll must be processed and what information must be included on employee pay stubs. It's crucial for LLC owners to understand the payroll regulations specific to their state and ensure they comply to avoid potential penalties or legal issues. Consulting with a local employment law expert can provide valuable guidance on state-specific payroll regulations.
Depending on the structure of your company, you might consider putting yourself on the payroll. While there are ways to do this legally, you need to be certain that you follow all the IRS regulations, or you might end up in legal trouble. The IRS treats most LLCs as partnerships or sole proprietorships, which don’t allow owners to be on the payroll. The traditional way for owners to make money from their LLCs is through what’s called an owner’s draw. This is the owner’s share of the profits, which the IRS treats as part of the owner’s personal income. The IRS considers single-owner LLC’s disregarded entities, meaning they treat the business and owner as one and the same. If you have business partners with which you share joint ownership of the LLC, they also receive owner’s draws of their own. The IRS considers multi-owner LLCs pass-through entities, meaning while the business reports its income, the LLC itself isn’t taxed and the owners’ profit shares are taxed as personal income.
If you want to put yourself on the payroll of your LLC as an employee, you must file for S-corporation status with the IRS and meet specific IRS requirements. You also may not pay yourself wages below what’s considered reasonable for your position in the business. The IRS watches for business owners who try to set their wages low in order to get income tax benefits. Make sure that you research the state requirement for S-Corp owners as well as not every state fully recognizes this status.
Setting up the payroll for your LLC requires you to follow specific steps, including registration with the IRS, the states in which you operate, and any local governments where you operate as well. Payroll expenses are tax deductible, and while you can put yourself on the payroll, there are strict rules and qualifications to be met if you do so. You should familiarize yourself with the applicable payroll laws for your LLC, and it would be wise to consider hiring an accountant or payroll service.