Yes, an LLC can pay employees. As its own legal entity, the LLC signs employment contracts, sets wages, and runs payroll under its own name and tax ID. What that actually takes is a federal and state employer setup, correct paperwork for every hire, tax withholding and deposits on the government’s schedule, and insurance most states require the moment the first employee starts. Owners are a separate question, because how an owner takes money out depends on how the LLC is taxed.
Register the LLC as an Employer
Before a single check goes out, the business needs a Federal Employer Identification Number. That nine-digit number is the LLC’s identity on every employment tax filing and deposit. You apply on Form SS-4, and the IRS’s online application issues the number immediately.1Internal Revenue Service. Instructions for Form SS-4 (Rev. December 2025)
Then register with the state for unemployment insurance and income tax withholding. Most states run both through a single online business portal. Those accounts are what let the LLC report and pay state employment taxes each quarter.
Paperwork for Every New Hire
Each new employee brings a short stack of forms. Form W-4 tells the LLC how much federal income tax to withhold from each paycheck. Form I-9 verifies identity and work authorization, and every U.S. employer has to complete one for each person hired.2USCIS. I-9, Employment Eligibility Verification
There is also a new-hire reporting requirement that catches many first-time employers off guard. Federal law requires you to report basic information about each new employee to your state’s Directory of New Hires, generally within 20 days of the hire date. The data feeds into the National Directory of New Hires and is used primarily to locate parents who owe child support.3Administration for Children and Families. New Hire Reporting for Employers Some states impose a tighter deadline, so check your state’s rule.
How LLC Owners Get Paid
This is where owner pay parts ways from employee pay. It turns on how the IRS taxes the LLC.
Default Tax Treatment
A single-member LLC is a disregarded entity for federal tax purposes, and the owner reports business income directly on their personal return.4Internal Revenue Service. Single Member Limited Liability Companies A multi-member LLC defaults to partnership taxation, and each member gets a Schedule K-1 for their share of income.5Internal Revenue Service. Topic No. 407, Business Income Under either default, owners take money out through draws or distributions, not through payroll. They pay self-employment tax on their share of business earnings instead of having FICA withheld from a paycheck.
Owners of a partnership-taxed LLC may also receive guaranteed payments for services they perform, regardless of whether the business turned a profit. Those payments are ordinary income to the recipient and a deductible expense to the LLC.6Office of the Law Revision Counsel. 26 USC 707 – Transactions Between Partner and Partnership
S-Corp Election Changes the Rules
If the LLC elects S-Corp taxation by filing Form 2553, owners who work in the business flip into employees for pay purposes. They must receive a reasonable salary run through regular payroll, with income tax, Social Security, and Medicare withheld like any other employee. The IRS has been clear that shareholder-employees who take distributions must also receive reasonable compensation as wages, and courts have consistently backed the agency.7Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers Only after a genuine salary can the owner take additional money as distributions, which are not subject to FICA. That split is the main reason LLCs elect S-Corp status.
Running Payroll for Employees
Payroll starts with gross pay. For hourly workers, that is hours worked times the agreed rate. For salaried employees, it is annual salary divided by the number of pay periods.
From each employee’s gross pay, the LLC withholds:
- Social Security tax at 6.2% of wages, up to the 2026 wage base of $184,500. The employer matches the same amount.8Social Security Administration. Contribution and Benefit Base
- Medicare tax at 1.45% of all wages, no cap, matched by the employer. Once an employee’s wages pass $200,000 in a calendar year, an additional 0.9% must be withheld from the employee only. There is no employer match on that extra 0.9%.9Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
- Federal income tax based on the employee’s W-4 and the IRS withholding tables.
- State and local taxes where they apply.
What is left after withholdings is net pay, delivered by direct deposit or check.
Non-exempt employees who work more than 40 hours in a single workweek must be paid at least one and a half times their regular hourly rate for the extra hours. You cannot average hours across two weeks to avoid overtime.10U.S. Department of Labor Wage and Hour Division. Fact Sheet #23: Overtime Pay Requirements of the FLSA The federal minimum wage is $7.25 per hour in 2026, and most states set a higher floor.
Depositing and Filing Employment Taxes
Withholding the taxes is only half of it. The LLC has to deposit them, along with the employer’s matching share, by electronic funds transfer. Deposits go through the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay for businesses, or an IRS business tax account.11Internal Revenue Service. Depositing and Reporting Employment Taxes
How often you deposit depends on payroll size. The IRS assigns either a monthly or semi-weekly schedule based on employment taxes reported in a prior lookback period. Most new employers start monthly.12Internal Revenue Service. Topic No. 757, Forms 941 and 944 – Deposit Requirements
Each quarter, the LLC files Form 941 summarizing wages paid, taxes withheld, and deposits made.11Internal Revenue Service. Depositing and Reporting Employment Taxes By January 31 of the following year, every employee must get a W-2, with copies filed with the Social Security Administration by the same date.13Social Security Administration. Deadline Dates to File W-2s If you have 10 or more information returns, electronic filing is mandatory.14Internal Revenue Service. Information Return Penalties
Penalties for Missing a Deposit
The IRS penalty for late employment tax deposits climbs with how late the deposit is:
- 1 to 5 days late: 2% of the unpaid deposit
- 6 to 15 days late: 5%
- 16 or more days late: 10%
- Still unpaid 10 days after the first IRS notice: 15%
The tiers replace each other rather than stacking. A deposit 20 days late triggers the 10% penalty, not 2% plus 5% plus 10%.15Internal Revenue Service. Failure to Deposit Penalty Late W-2 filings carry separate penalties of $60 per return within 30 days of the deadline, rising to $340 per return if filed after August 1 or not at all.14Internal Revenue Service. Information Return Penalties
Federal and State Unemployment Taxes
On top of FICA, the LLC owes federal unemployment tax under FUTA. The statutory rate is 6.0% on the first $7,000 of wages paid to each employee per year. Employers who pay their state unemployment taxes on time receive a credit of up to 5.4%, bringing the effective FUTA rate down to 0.6%, a maximum of $42 per employee annually.16Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide That credit can shrink if the state has outstanding federal unemployment trust fund loans.17Internal Revenue Service. FUTA Credit Reduction
FUTA is reported annually on Form 940, generally due January 31 of the following year. If cumulative FUTA liability passes $500 during any calendar quarter, deposit that amount by the last day of the month after the quarter ends.
State unemployment tax runs alongside FUTA. Each state sets its own rate and wage base. Taxable wage bases per employee run anywhere from $7,000 to over $78,000 depending on the state, and new employers usually get a default rate until they build an experience rating.
Workers’ Compensation Insurance
Nearly every state requires employers to carry workers’ compensation once they have even one employee. Only Texas makes coverage fully optional. The insurance covers medical bills and lost wages when an employee is hurt on the job, and the employer pays the full premium. Deducting any part of it from an employee’s pay is generally prohibited.
Premiums vary by industry and state. Office work can cost well under a dollar per $100 of payroll, while physical labor or construction runs much higher. Skipping required coverage can bring daily fines, stop-work orders, and personal liability for the LLC’s owners if an employee gets injured.
Recordkeeping
The IRS wants employment tax records kept for at least four years after the tax is due or paid, whichever is later.18Internal Revenue Service. How Long Should I Keep Records The Department of Labor wants basic payroll records, including employee names, hours worked, wages paid, and deductions, kept for at least three years.19eCFR. 29 CFR Part 516 – Records to Be Kept by Employers Since the IRS window is longer, four years covers both. Time records like daily start and stop times have a two-year retention under federal wage and hour rules, but most payroll software holds them alongside everything else anyway.
Health Coverage Only Kicks In at 50 Employees
An LLC that averages 50 or more full-time workers (including full-time equivalents) during the prior year is an Applicable Large Employer under the Affordable Care Act. That designation triggers a requirement to offer affordable coverage meeting minimum value standards to full-time employees, or face potential penalties.20Internal Revenue Service. Determining if an Employer Is an Applicable Large Employer LLCs under 50 full-time employees have no federal mandate to provide health insurance, though many offer it to compete for talent.