To make yourself a W-2 employee, you form a business entity (most often an S-corporation, or an LLC that elects S-corp tax treatment), get an Employer Identification Number, put yourself on the company’s payroll at a reasonable salary, and take on the federal and state filings that come with being an employer. You end up wearing both hats: the employer who withholds and remits taxes, and the employee who receives a paycheck and a W-2 in January.
The appeal is the tax split. A sole proprietor or single-member LLC owner pays self-employment tax of 15.3 percent on net earnings, covering both the employer and employee portions of Social Security and Medicare. As an S-corp employee, you pay only the employee’s 7.65 percent on your salary, the S-corp pays the matching 7.65 percent as a deductible business expense, and profit taken as a distribution isn’t subject to FICA.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The catch is the reasonable-salary rule, covered below.
Form the Entity First
Payroll runs through a legal employer, so the business has to exist before you can hire yourself. Most owners aiming for W-2 status use an S-corporation, either by incorporating as one or by forming an LLC and electing S-corp tax treatment with the IRS. Set up the entity with your state before you apply for an EIN, because the IRS may delay processing an EIN application when the entity doesn’t yet exist on state records.2Internal Revenue Service. Get an Employer Identification Number
Get an Employer Identification Number
The EIN is the nine-digit number the IRS uses to identify your business on every payroll filing. You’ll need it to report wages, withhold taxes, and file quarterly returns. Applications go through the IRS, and online applicants receive the number immediately.2Internal Revenue Service. Get an Employer Identification Number
Set a Reasonable Salary
This is the step that trips people up. Before taking any distributions from an S-corp, you must pay yourself a reasonable salary. The IRS looks at your training, your responsibilities, the time you devote to the business, what comparable businesses pay for similar work, and the company’s dividend history to decide whether the number is defensible.3Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues If the business earns revenue primarily through your personal services, the IRS expects most of that revenue to be classified as wages subject to employment taxes.
Owners who skip the salary and take only distributions have lost this argument repeatedly. In one Tax Court case, an accountant took only dividends from his S-corp while performing all of the firm’s work; the court reclassified the dividends as wages and assessed employment taxes on the full amount.4Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers The rule is straightforward: if you received cash or had the right to receive it, the S-corp must determine and report a reasonable salary for you. Set the salary too low and you land in the same problem.
Complete the New-Hire Paperwork on Yourself
Being both sides of the transaction doesn’t excuse the forms. Every W-2 hire, including you, needs the same federal documents.
Form W-4
Form W-4 tells the employer how much federal income tax to withhold from each paycheck.5Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate The current version (redesigned in 2020) dropped the old allowances system. You select filing status, indicate whether you have multiple jobs, claim credits for dependents, and optionally report other income or additional deductions.6Internal Revenue Service. Form W-4, Employee’s Withholding Certificate If the withholding doesn’t match your actual tax liability, you’ll either owe at filing time or get an oversized refund. Update the form when your circumstances change.
Form I-9
Every employer must verify that new hires are authorized to work in the United States, and that includes hiring yourself. You complete Section 1 no later than the first day of work, and the employer side reviews identity and work-authorization documents within three business days of the hire date.7U.S. Citizenship and Immigration Services. Completing Section 2, Employer Review and Attestation You can present a single List A document that proves both identity and work authorization (such as a U.S. passport or permanent resident card), or a combination of one List B identity document (like a driver’s license) and one List C work-authorization document (like an unrestricted Social Security card).8Department of Homeland Security, U.S. Citizenship and Immigration Services. Form I-9 Employment Eligibility Verification Federal contractors with certain contract clauses must also run new hires through E-Verify.9E-Verify. Federal Contractors
State Withholding Form
Most states with an income tax use their own withholding form on top of the federal W-4. The W-4 controls only federal withholding. Skip the state form and your payroll will typically default to the highest withholding rate, usually single with zero adjustments. Check your state tax agency for the correct form.
Run Payroll and File the New-Hire Report
Once the forms are complete, enter the information into a payroll system. For an owner paying themselves, a payroll service handles the withholding math, tax deposits, and filings automatically. Doing S-corp payroll by hand is where most errors happen.
Federal law requires employers to report new hires to the state where the employee works within 20 days of the hire date, and some states set shorter deadlines. The report includes the employee’s name, address, Social Security number, and hire date, along with the employer’s name, address, and EIN. The state forwards the information to the National Directory of New Hires, which child support agencies use to locate parents who owe support.10Administration for Children & Families. New Hire Reporting
Your first paycheck arrives on the next regular pay cycle after your start date. Most payroll platforms offer a portal where you can confirm direct deposit details, view pay stubs, and check that withholding matches your W-4 selections. Catching a withholding error in the first pay period beats correcting months of mistakes later.
Payroll Taxes You Now Owe
Putting yourself on payroll triggers several employer tax obligations. As the sole owner-employee, you fund both sides.
Social Security and Medicare (FICA)
Each side pays 6.2 percent for Social Security and 1.45 percent for Medicare, for 7.65 percent per side and 15.3 percent total.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The Social Security portion applies only to wages up to the annual wage base, which is $184,500 for 2026.11Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet Earnings above that threshold are not subject to the 6.2 percent Social Security tax. Medicare has no wage cap.
Employees who earn more than $200,000 in a year ($250,000 if married filing jointly) owe an Additional Medicare Tax of 0.9 percent on wages above that threshold. The employer does not match this additional amount.12Internal Revenue Service. Topic No. 560, Additional Medicare Tax
Federal Unemployment (FUTA)
FUTA funds unemployment compensation for workers who lose their jobs. The base rate is 6.0 percent on the first $7,000 of each employee’s wages per year. Employers who pay state unemployment taxes on time receive a credit of up to 5.4 percent, reducing the effective FUTA rate to 0.6 percent and capping the annual cost at $42 per employee.13Employment & Training Administration, U.S. Department of Labor. Unemployment Insurance Tax Topic FUTA is reported and paid annually on Form 940.14Internal Revenue Service. Instructions for Form 940
State Unemployment and Workers’ Compensation
Every state runs its own unemployment insurance program funded by employer contributions. New employers typically get an introductory tax rate that adjusts over time based on claims history. Nearly all states also require workers’ compensation insurance covering medical costs and lost wages for on-the-job injuries; the cost varies widely by industry and state. Both obligations start the moment you have a W-2 employee on payroll, even when that employee is you.
Quarterly and Annual Filings
Form 941
Employers use Form 941 to report federal income tax withheld from employees plus both shares of Social Security and Medicare. It’s due by the last day of the month following each quarter’s end: April 30, July 31, October 31, and January 31.15Internal Revenue Service. Instructions for Form 941 (Rev. March 2026) Missing a deadline triggers penalties and interest.
Form W-2
By January 31 of each year, every employer must give each employee a Form W-2 showing total wages earned and taxes withheld during the prior year, and file the same information with the Social Security Administration by that same date.16Social Security Administration. Employer W-2 Filing Instructions and Information – First Time Filers
Late or incorrect W-2 filings carry per-form penalties that escalate with delay. For returns due in 2026, the penalty is $60 per form if filed within 30 days of the deadline, $130 if filed by August 1, and $340 if filed after August 1 or not filed at all. Intentional disregard raises the penalty to $680 per form.17Internal Revenue Service. Information Return Penalties
Records to Keep
Being an employer creates record-keeping obligations that outlast each tax year. The IRS requires employment tax records to be kept at least four years after the due date of the return or the date the tax was paid, whichever is later.18Internal Revenue Service. Employment Tax Recordkeeping
Form I-9 has its own retention rule: three years after the hire date or one year after employment ends, whichever is later.19USCIS. 10.0 Retaining Form I-9 Under the Fair Labor Standards Act, employers must also keep records of hours worked, wages paid, and deductions for each employee.20U.S. Department of Labor. Recordkeeping and Reporting If the IRS ever questions your salary or reclassifies a distribution as wages, clean payroll records are your defense.