If you own your business and plan to pay yourself through payroll, first check that your tax setup allows it. Whether an owner can be paid through payroll depends on how the IRS taxes the business. This article covers the common tax setups, which ones let owners be paid through payroll, and what to check before you add yourself.
Can I pay myself through payroll?
It depends on how your LLC is taxed:
| How your LLC is taxed | Can you, as an owner, be paid through payroll? |
| Default tax treatment (no S-Corp election) | The IRS generally doesn’t treat an LLC owner as an employee of the business. Owners usually take money out as owner’s draws, not as wages through payroll. |
| S-Corp election | Yes. The IRS expects owners who work in the business to be paid a reasonable salary through payroll. |
| C-Corp election | Yes. An owner who works in the business can be paid a salary through payroll, as an employee. |
Good to know: Most LLCs start with the default tax treatment. Being taxed as an S-Corp doesn’t happen automatically. It’s an optional election you make with the IRS.
How is my LLC taxed by default?
It depends on how many owners your LLC has:
- One owner (single-member LLC): taxed as a “disregarded entity.” The IRS looks through the LLC to you as the owner. If the owner is an individual, it’s taxed as a sole proprietorship, and you report the business income on your personal tax return.
- More than one owner (multi-member LLC): taxed as a partnership. The LLC files its own informational return, and each owner reports their share of the profit or loss on their personal tax return.
How your LLC is taxed doesn’t change its limited liability protection. It only affects how your taxes are handled.
What is an S-Corp election?
An S-Corp election is a tax choice, not a type of company. Your LLC stays an LLC, and the IRS taxes it differently.
- How it’s filed: with the IRS, using Form 2553.
- Owner salary: if you work in the business, you must be paid a salary through payroll. The IRS expects that salary to be reasonable for the work you do. Profits beyond that salary can be taken as distributions.
- Taxes: with the default tax treatment, business profit is generally subject to self-employment tax (Social Security and Medicare tax for people who work for themselves). With an S-Corp, payroll taxes apply to your salary.
- Extra requirements: you’ll need to run payroll and file an S-Corp tax return (Form 1120-S). State tax rules for S-Corps vary, and some states charge their own tax or fee, separately from the IRS.
You can file an S-Corp election with us. Go to Compliance, then S-Corporation Election.
Whether an S-Corp election is right for your business is a question for a tax professional.
What happens if I pay myself without the right tax setup?
Our payroll service runs payroll based on the details you enter. It’s up to you to confirm that your tax setup allows you to be paid through payroll.
Paying yourself without the right tax setup often shows up as a problem later, when taxes are filed. Fixing it then can mean corrected filings, fees, and penalties.
Before you add yourself to payroll
- Check how your LLC is taxed today. If you haven’t made an election, it’s taxed under the default rules above.
- Speak with a tax or financial professional about your situation.
- Add yourself to payroll only once your tax setup allows it.
Does this affect paying my employees or contractors?
No. Paying employees and contractors who are not owners works the same whatever your tax setup. This article only covers whether you, as an owner, can be paid through payroll.
The information in this article is general and for educational purposes only. We’re always here to help with our products and services. For answers about your specific business, we recommend consulting a legal attorney or a tax or financial professional, as we’re unable to provide legal, financial, or tax advice.