To pay employees in your LLC, you get a Federal Employer Identification Number, collect a signed Form I-9 and Form W-4 from every new hire, register with your state’s labor and unemployment agencies, and then run each pay cycle by withholding federal income tax and the employee share of Social Security and Medicare, matching those FICA taxes from LLC funds, depositing everything with the IRS on schedule, and filing Form 941 each quarter and W-2s at year end. The mechanics are the same whether your LLC has one employee or fifty. What changes with size is the deposit frequency and the cost of a mistake.
Before You Run the First Payroll
A few pieces of paperwork have to be in place before any money moves. Skipping them creates compliance problems that get harder to unwind the longer payroll runs.
Get an EIN
Your LLC needs a Federal Employer Identification Number, obtained by filing Form SS-4 with the IRS. This nine-digit number goes on every employment tax return you file.1Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN) You can apply online at irs.gov and get the number immediately. The IRS explicitly warns against using a personal Social Security number in its place.2Internal Revenue Service. Instructions for Form SS-4 (Rev. December 2025)
Collect Form I-9 and Form W-4 From Each Hire
Every new hire completes Form I-9 to verify identity and work authorization. You must physically examine the employee’s identity documents within three business days after their first day of work. Acceptable documents include a U.S. passport, a permanent resident card, or a combination such as a state-issued ID plus a Social Security card. Photocopies don’t count, with a narrow exception for certified birth certificates.3U.S. Citizenship and Immigration Services. Instructions for Form I-9, Employment Eligibility Verification
Each employee also fills out Form W-4, which tells you how much federal income tax to withhold based on filing status, dependents, other income, and any extra withholding they request.4Internal Revenue Service. Form W-4 – Employee’s Withholding Certificate (2026)
Register With Your State and Report New Hires
Beyond the federal setup, register with your state’s department of labor and unemployment insurance agency. Most states also require workers’ compensation insurance, even for an LLC with a single employee. Federal law then requires you to report every new hire to a state directory within 20 days; about a dozen states impose shorter deadlines of 7 to 10 days.5The Administration for Children & Families. New Hire Reporting The required information is basic: the employee’s name, address, Social Security number, hire date, and your business name, address, and EIN.
One boundary worth stating upfront: this article covers W-2 employees. If a worker sets their own hours, provides their own tools, and offers services to the public, they may be an independent contractor rather than an employee, and you report their pay on Form 1099-NEC instead of running them through payroll. Getting this wrong makes the LLC liable for all the employment taxes it should have withheld and matched, plus interest and penalties.6Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor
What to Withhold and Match on Each Paycheck
Gross pay is the total before deductions. Net pay is what lands in the employee’s account. Between the two sit the withholdings you send to the government and the matching taxes you pay from LLC funds.
Federal Income Tax
You withhold federal income tax using the employee’s W-4 and the withholding tables in IRS Publication 15. The amount depends on filing status, pay frequency, and W-4 entries. Supplemental wages such as bonuses and commissions can be withheld at a flat 22% as long as the employee’s total supplemental wages for the year don’t exceed $1 million; the excess above that is withheld at 37%.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Social Security and Medicare (FICA)
Both sides pay into FICA. The employee’s share is 7.65% of gross wages, split as 6.2% for Social Security and 1.45% for Medicare, and the LLC matches that amount dollar for dollar.8Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates For 2026, Social Security tax applies only to the first $184,500 in wages per employee. Medicare has no wage cap.9Social Security Administration. Contribution and Benefit Base
Once an employee’s wages exceed $200,000 in a calendar year, you also withhold an Additional Medicare Tax of 0.9%. There is no employer match on this piece.10Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Federal Unemployment Tax
FUTA is employer-only. The statutory rate is 6% on the first $7,000 of wages paid to each employee during the year.11Office of the Law Revision Counsel. 26 USC 3301, Rate of Tax12Office of the Law Revision Counsel. 26 USC 3306, Definitions Paying state unemployment taxes on time earns a credit of up to 5.4%, which drops the effective rate to 0.6%, or a maximum of $42 per employee per year. FUTA is reported and paid annually on Form 940.13Internal Revenue Service. About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
State Unemployment and Workers’ Comp
Every state runs its own unemployment insurance program with its own tax rate and wage base. For 2026, state taxable wage bases range from $7,000 to over $78,000, and rates vary by industry and claims history. New employers usually pay a default rate until the state assigns an experience-based rate. Workers’ compensation premiums are separate and also vary by state and job classification. Check your state labor department’s website for the specifics.
Minimum Wage and Overtime
The Fair Labor Standards Act sets the floor for what you can pay. The federal minimum wage is $7.25 per hour, and if your state’s minimum is higher you pay the state rate.14U.S. Department of Labor. State Minimum Wage Laws
Non-exempt employees receive overtime at 1.5 times their regular rate for any hours worked beyond 40 in a workweek. An employee is exempt from overtime only if they meet the duties tests for an executive, administrative, or professional role and earn at least the minimum salary threshold. Following a federal court decision that vacated the Department of Labor’s 2024 rule, the currently enforced threshold is $684 per week, or $35,568 per year.15U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption A salaried employee earning less than that is non-exempt and must receive overtime regardless of job title.
The FLSA also requires accurate records of hours worked for every non-exempt employee. No specific timekeeping system is mandated, but you need a reliable record of daily and weekly hours. It’s the first thing the Department of Labor asks for in an audit.
Depositing the Taxes You Withheld
Most LLCs pay employees by direct deposit, though physical checks work too. After paying employees, you deposit the withheld federal income tax and FICA, plus your employer FICA match, with the IRS by electronic funds transfer. The Electronic Federal Tax Payment System is the standard route, and the IRS also accepts payments through Direct Pay and business tax accounts.16Internal Revenue Service. Depositing and Reporting Employment Taxes
Deposit frequency depends on the size of your tax liability. If your total employment taxes during the IRS lookback period were $50,000 or less, you deposit monthly, with each deposit due by the 15th of the following month. If your lookback-period liability exceeded $50,000, you move to a semiweekly schedule, depositing within a few days of each payday.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide Most new LLCs start monthly and only shift if the business grows substantially.
Late deposits trigger escalating penalties:17Internal Revenue Service. Failure to Deposit Penalty
- 1 to 5 days late: 2% of the unpaid deposit
- 6 to 15 days late: 5%
- More than 15 days late: 10%
- After IRS notice demanding payment: 15%
The percentages don’t stack. A deposit more than 15 days late is 10%, not 2% plus 5% plus 10%.
Final Paychecks
Federal law does not require immediate payment when an employee leaves. Under the FLSA, the next regular payday is sufficient.18U.S. Department of Labor. Last Paycheck Many states impose shorter deadlines, sometimes same-day upon termination, so check your state rules before relying on the federal timeline.
Quarterly and Year-End Filings
Payroll creates a reporting calendar you have to keep.
Quarterly: Form 941
Each quarter, you file Form 941 to report total federal income tax withheld, the employee and employer shares of Social Security and Medicare, and any Additional Medicare Tax. Due dates are April 30, July 31, October 31, and January 31.19Internal Revenue Service. Employment Tax Due Dates Late filings carry a 5% penalty per month, up to 25%.20Internal Revenue Service. Failure to File Penalty
Annually: Form 940
Form 940 reports FUTA liability for the year and is due January 31. If you deposited all FUTA tax when due, you get an extra 10 days to file.13Internal Revenue Service. About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Year-End: W-2s
You furnish Form W-2 to every employee and file copies with the Social Security Administration by February 1, 2027 for the 2026 tax year.21Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026)
Personal Liability if You Skip the Deposits
This is the piece that catches LLC owners off guard. The money you withhold from paychecks for federal income tax and the employee share of FICA is considered held in trust for the government. If the LLC fails to send it, the penalty doesn’t stop at the business.
The IRS can assess the trust fund recovery penalty against any “responsible person” who willfully fails to collect, account for, or pay over trust fund taxes. The penalty equals 100% of the unpaid trust fund taxes. An LLC member, manager, or even an employee with authority over company finances can qualify as a responsible person.22Internal Revenue Service. Trust Fund Recovery Penalty (TFRP) Overview and Authority
The LLC’s limited liability protection does not shield members from this penalty. The IRS looks at who had the power to decide which bills got paid. If you could have directed LLC funds toward payroll taxes and chose to pay other creditors instead, that’s the kind of willfulness the IRS targets. Payroll tax deposits are the single most important bill your LLC pays on time.
Paying Yourself as an Owner
Paying LLC members is not the same as paying employees, and the correct method depends on how the LLC is taxed.
Single-Member LLC (Sole Proprietorship Taxation)
If you’re the only member and haven’t elected different tax treatment, the IRS treats the LLC as a disregarded entity. You pay yourself through owner’s draws, which are transfers from the business account to your personal account. Draws are not wages, and you don’t run them through payroll or withhold payroll taxes. You pay self-employment tax of 15.3% (12.4% Social Security plus 2.9% Medicare) on the net business profit when you file your personal return, regardless of how much you actually withdrew.23Social Security Administration. FICA and SECA Tax Rates
Multi-Member LLC (Partnership Taxation)
A multi-member LLC is taxed as a partnership by default, and members cannot be employees of the partnership. Members receive guaranteed payments for services, which the partnership deducts as a business expense on Form 1065. The member reports guaranteed payments as ordinary income on Schedule E. These payments are not subject to income tax withholding but are subject to self-employment tax.24Internal Revenue Service. Publication 541, Partnerships Members may also take profit distributions based on ownership percentages, which pass through to each member’s personal return.
LLC That Elected S Corporation Tax Treatment
An LLC that files Form 2553 to elect S corporation status changes the picture. Owner-employees must receive a W-2 salary with normal payroll tax withholding. Profit distributions beyond that salary are not subject to the 15.3% self-employment tax, only income tax. The catch: the salary must be “reasonable compensation” for the services the owner actually performs. Setting an artificially low salary to minimize payroll taxes is a well-known audit trigger.25Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers
The IRS doesn’t publish a fixed formula for reasonable compensation. It looks at the nature and extent of services performed, hours worked, training and experience required, and what comparable businesses pay for equivalent roles. Bureau of Labor Statistics wage data is a useful starting point for documenting the decision. Courts have consistently sided with the IRS when owners paid themselves nominal salaries while taking large distributions.