Can My Employer Pay Me Through My LLC: IRS and DOL Rules

Your employer can pay your LLC instead of putting you on payroll, but only if the work you do genuinely qualifies as an independent contractor engagement. Forming an LLC and asking a company to redirect your paycheck through it does not convert you from an employee into a contractor. The IRS and the Department of Labor both look at the substance of the working relationship, not the label on the contract or the existence of a business entity in the middle. If the relationship still looks like employment, the arrangement violates tax and labor law no matter how the money moves.

So the real question is not whether an LLC can receive the payments. It’s whether your work fits the contractor tests. Two separate agencies apply two separate tests, and you need to satisfy both.

The IRS Test: Are You Actually a Contractor?

The IRS groups its analysis into three categories.

Behavioral control asks whether the company controls what you do and how you do it, including your schedule, methods, and workflow. Financial control looks at how you are paid, whether you cover your own expenses, and who provides the tools and supplies. Type of relationship considers whether the company offers you employee-type benefits like insurance or a pension, whether your work is a key part of the company’s regular business, and whether the engagement has a defined end point.¹

Someone who sets their own hours, uses their own equipment, serves multiple clients, and delivers defined projects with clear end dates fits the contractor profile. Someone who receives a set schedule, uses company-provided tools, works exclusively for one company, and performs the same core function as the company’s staff fits the employee profile. That’s true even if both sides signed a contract calling the arrangement “independent.”

If you believe you have been misclassified, you can file Form SS-8 with the IRS to request a formal determination of your worker status.¹

The DOL Test Runs Alongside the IRS Test

The Department of Labor applies a separate six-factor “economic reality” test under the Fair Labor Standards Act, updated in a final rule effective March 11, 2024. The factors are your opportunity for profit or loss based on your own business decisions; whether your investments are entrepreneurial compared to the company’s; how permanent the working relationship is; how much control the company exercises over how the work is performed; whether the work is integral to the company’s business; and your skill and initiative in the open market.² No single factor decides it. The DOL weighs the totality of the relationship.

The Department has said this directly: having an EIN or LLC paperwork does not make you a contractor under the FLSA. Forming a business entity does not change the underlying nature of the work, and even a worker’s agreement to the arrangement does not make misclassification legal.³

What Happens If the Classification Is Wrong

When the IRS reclassifies a worker from contractor to employee, the hiring company owes back payroll taxes. Under reduced-rate provisions in the tax code, the company pays a percentage of wages for the income tax withholding it should have collected, plus a portion of the employee’s share of Social Security and Medicare taxes on top of the full employer share. Those rates roughly double if the company also failed to file the required year-end information returns. The company may also owe interest on the unpaid amounts.

For you, misclassification means you have been paying both halves of Social Security and Medicare taxes (15.3 percent instead of the 7.65 percent an employee pays) and missing benefits and protections you were legally entitled to receive.¹

What You Give Up by Leaving Payroll

Even when the arrangement is genuinely legal, be clear about what you trade away compared to employment.

Employer-sponsored benefits. Federal law limits participation in employer health and retirement plans to employees. You buy your own health insurance and fund your own retirement accounts.
Unemployment insurance. Employers pay unemployment taxes on employee wages. Nobody pays those taxes on contractor earnings, so you generally cannot collect unemployment if the client ends the engagement.
Workers’ compensation. Employees injured on the job are covered by their employer’s workers’ comp policy. LLC owners without employees are not covered by a client’s policy and would need to purchase their own coverage.
Overtime and minimum wage. The FLSA guarantees employees a minimum hourly wage and overtime for hours over 40 per week. Contractors are not covered.⁴
Payroll tax sharing. Employees split Social Security and Medicare taxes with their employer. Contractors pay the full 15.3 percent through self-employment tax.

These costs are real. The rate you negotiate as a contractor needs to cover the additional taxes, insurance premiums, and lost benefits you are now absorbing.

What the Client Needs Before the First Payment

An Employer Identification Number

An EIN is a nine-digit number the IRS issues to identify your business for tax purposes. You can apply online at IRS.gov for free, and the number is issued immediately.⁵ Whether the EIN or your Social Security Number goes on tax paperwork depends on how the LLC is classified.

A Completed Form W-9

The client will ask you to fill out a W-9 before any money moves. The form gives them your taxpayer identification number and tax classification so they can report payments correctly.⁶

How you complete it depends on your LLC’s tax election. If your LLC has elected to be taxed as a C corporation, S corporation, or partnership, check the “LLC” box, enter the appropriate letter (C, S, or P), and provide the LLC’s EIN. If you have a single-member LLC that has not made a corporate or partnership election, the IRS treats it as a “disregarded entity.” In that case, check the box for “Individual/sole proprietor or single-member LLC” and provide your personal Social Security Number or your own EIN, not the LLC’s EIN.⁷⁸ Getting the classification wrong causes reporting errors, so confirm the LLC’s tax status before you sign.

A Written Independent Contractor Agreement

A contract between your LLC and the client does two things. It governs the business terms, and it reinforces the independent nature of the arrangement. The agreement should spell out the scope of services, delivery deadlines, payment amounts and schedule, and the legal name of your LLC as registered with the state. Language confirming that the engagement is non-exclusive, meaning you are free to serve other clients, helps demonstrate contractor status if a federal agency ever questions it.

Your Tax Obligations Once the LLC Is Being Paid

Form 1099-NEC

Any client that pays your LLC $600 or more during the calendar year must file Form 1099-NEC with the IRS and send you a copy by January 31 of the following year, reporting the total non-employee compensation.⁹

There is an exception. If your LLC is taxed as a C corporation or S corporation, the client generally does not need to file a 1099-NEC for payments to your business. Attorney fees are the main carve-out from that exception, and get reported regardless of corporate structure.⁹

Self-Employment Tax

You owe self-employment tax of 15.3 percent on your net earnings: 12.4 percent for Social Security and 2.9 percent for Medicare.¹⁰ The Social Security portion applies only to earnings up to $184,500 in 2026; the Medicare portion applies to all net earnings with no cap.¹¹

You can deduct the employer-equivalent portion, half of your self-employment tax, when calculating your adjusted gross income. The deduction is available whether or not you itemize.¹⁰

Quarterly Estimated Payments

Because no taxes are withheld from business-to-business payments, you must estimate and pay your income tax and self-employment tax in quarterly installments using Form 1040-ES. Payments are due in April, June, September, and January of the following year.¹²

Underpay and the IRS charges a penalty calculated as interest on the shortfall. For the first quarter of 2026, the underpayment interest rate is 7 percent (the federal short-term rate plus three percentage points).¹³ You generally avoid the penalty if you owe less than $1,000 at filing, or if your quarterly payments covered at least 90 percent of the current year’s tax or 100 percent of the prior year’s tax, whichever is smaller.¹²

The Qualified Business Income Deduction

LLC owners with pass-through income may qualify for the qualified business income deduction, which allows you to deduct up to 20 percent of your net business income from your taxable income. The deduction is available to sole proprietors, partners, and S corporation shareholders, which covers most LLC structures.¹⁴

The full deduction is available if your total taxable income falls below a statutory threshold, which is adjusted for inflation each year. Above that threshold, the deduction phases out over a range of $75,000 ($150,000 for joint filers), and additional limits apply based on your type of business and the wages your business pays.¹⁴ Certain service fields, including law, health care, consulting, and financial services, face stricter phase-outs at higher income levels.

Considering an S Corporation Election

If your LLC earns substantially more than a reasonable salary for the work you do, electing S corporation tax treatment can reduce your self-employment tax burden. Under an S election, you pay yourself a reasonable salary subject to normal payroll taxes, and the remaining profit passes through to you as a distribution that is not subject to self-employment tax.¹⁵

The IRS scrutinizes these arrangements. The salary you pay yourself must be reasonable based on your training, experience, duties, time spent, and what comparable businesses pay for similar work. If the IRS decides the salary is unreasonably low, it can reclassify distributions as wages and assess back payroll taxes.¹⁵ The election also adds payroll processing costs and extra filings, so it typically makes sense only once your LLC’s net income is well above what you would earn as a salary for the same work.

1
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
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Federal Register. Employee or Independent Contractor Classification Under the Fair Labor Standards Act
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U.S. Department of Labor. Misclassification Under the Fair Labor Standards Act
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United States Department of Labor. Misclassification of Employees as Independent Contractors Under the Fair Labor Standards Act
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Internal Revenue Service. Get an Employer Identification Number
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Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
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Internal Revenue Service. Form W-9 (Rev. March 2024)
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Internal Revenue Service. Single Member Limited Liability Companies
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Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025)
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Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
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Social Security Administration. Contribution and Benefit Base
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Internal Revenue Service. Estimated Taxes
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Internal Revenue Service. Quarterly Interest Rates
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Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income
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Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues