To set up payroll for an LLC, start with your tax classification, because it decides whether the owners belong on payroll at all. From there the sequence is the same for every LLC: get a federal Employer Identification Number, register with your state’s tax and unemployment agencies, collect a W-4 and I-9 from each new hire, report the hire to the state, choose a pay schedule, calculate wages and withholdings, deposit the taxes through the IRS’s electronic system, and file quarterly and annual returns. Each step has its own deadline, and missing one can reach the owners personally.
Confirm How Your LLC Is Taxed Before You Add Anyone to Payroll
The IRS’s default treatment of your LLC controls whether the owners take draws or receive W-2 wages. Get this wrong and you either create filings you never needed or expose yourself to back taxes and penalties.
- A single-member LLC is a disregarded entity by default, taxed like a sole proprietorship. The owner cannot be on payroll and instead takes draws and pays self-employment tax. Payroll applies only to non-owner employees.
- A multi-member LLC is taxed as a partnership by default. Members cannot be employees; they take draws and report their share of income on their personal returns. Payroll again applies only to non-owner workers.
- An LLC that has filed Form 2553 to be taxed as an S corporation must put any owner who actively works in the business on payroll at a reasonable salary. If the IRS decides the salary was unreasonably low, it can reclassify distributions as wages and add back taxes and penalties.
- An LLC taxed as a C corporation must likewise pay working owners reasonable compensation through payroll.
A single-member LLC owner who runs payroll for themselves under the default status creates unnecessary filings. An S-corp-elected LLC owner who skips payroll and takes only distributions risks having those distributions treated as wages. Settle the classification before anything else.
Apply for an Employer Identification Number
Every LLC that hires needs an EIN, the nine-digit federal tax ID that appears on every payroll return, deposit, and W-2 you file. You apply on Form SS-4 through the IRS website, by fax, or by mail; the online application returns the number immediately.1Internal Revenue Service. About Form SS-4, Application for Employer Identification Number The form asks for the LLC’s legal name, formation date, and principal business activity.
If your LLC already has an EIN from formation, use it. You only need a new one if the structure has changed in a way that requires it, such as a conversion from a single-member to a multi-member LLC.
Register With Your State Tax and Unemployment Agencies
Federal registration alone is not enough. Before you withhold anything from a paycheck, you need accounts with your state and sometimes your locality.
State Income Tax Withholding
If your state has an income tax, open a state withholding account so you can deduct state income tax and remit it to the state revenue department. Registration usually asks for your EIN, the LLC’s physical address, and an estimate of your workforce size. States without a broad-based income tax do not require this account.
State Unemployment Insurance
Every state requires employers to pay into an unemployment insurance fund. You register with the state department of labor or workforce agency and receive an employer tax rate. New employers are usually assigned a default rate that commonly falls between 1% and 3%, and the rate later adjusts based on how many former employees file claims against your account.
Local Taxes and Disability Programs
Some cities and counties impose local income or payroll taxes that require a separate account with the local tax authority. Roughly a dozen states run mandatory disability insurance or paid family leave programs with employer contributions, employee deductions, or both. Contribution rates range from about 0.08% to 1.3% of wages depending on the state and program. Check with your state’s labor or revenue department to confirm which accounts apply.
Collect a W-4 and an I-9 From Each New Hire
Two federal forms need to be on file before an employee starts work.
The W-4, or Employee’s Withholding Certificate, tells you how much federal income tax to withhold from each paycheck. It captures the employee’s filing status, any other jobs, and any credits or deductions they want factored in.2Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate Many states have their own withholding certificate as well; collect it if required.
The I-9, Employment Eligibility Verification, is how you confirm each new hire is authorized to work in the United States.3U.S. Citizenship and Immigration Services. I-9, Employment Eligibility Verification The employee presents original identity and work-authorization documents (a U.S. passport, or a driver’s license paired with a Social Security card, for example), and you examine them and record the details. Incomplete or missing I-9s can produce civil penalties that reach several thousand dollars per violation, and knowingly hiring unauthorized workers carries steeper fines and potential criminal liability.4U.S. Citizenship and Immigration Services. Form I-9 Instructions
If your LLC holds federal contracts valued above $150,000 with a performance period of 120 days or more, you may also need to use E-Verify to cross-check I-9 data against government records.5E-Verify. Who Is Affected by the E-Verify Federal Contractor Rule Some states also mandate E-Verify for all employers.
Report Each New Hire to Your State
Federal law requires every employer to report each new hire to a state directory of new hires. The report includes the employee’s name, address, Social Security number, and hire date, plus the LLC’s name, address, and EIN.6Office of the Law Revision Counsel. 42 U.S. Code 653a – State Directory of New Hires You generally have 20 days from the hire date, though some states set a shorter window. States use the data mainly to locate parents who owe child support, and also for unemployment and public assistance fraud prevention.
Choose a Pay Schedule and Payment Method
Most states set a minimum pay frequency, and some apply different rules to hourly and salaried workers.7U.S. Department of Labor. State Payday Requirements Check the state payday law before locking in a schedule. Common options are weekly (52 pay periods a year), biweekly (26), semi-monthly (24), and monthly (12).
Most LLCs pay by direct deposit. Federal law allows it but does not let you force employees to use a specific bank as a condition of employment. You can require direct deposit generally as long as the employee picks their own institution, or you can offer a choice between direct deposit at a designated bank and a paper check. Provide a pay stub each period showing gross pay, each deduction, and net pay.
Calculate Wages and Withholdings
Every paycheck starts with gross pay: hours worked multiplied by the hourly rate, or the annual salary divided by the number of pay periods. From that amount you subtract several taxes.
Social Security and Medicare (FICA)
Withhold 6.2% of wages for Social Security and 1.45% for Medicare. The LLC pays a matching amount, so the combined rate is 15.3%.8Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Social Security applies only to the first $184,500 of wages in 2026; once an employee crosses that, you stop withholding the 6.2%.9Social Security Administration. Contribution and Benefit Base Medicare has no wage cap.
An additional 0.9% Medicare tax kicks in once an employee’s wages exceed $200,000 in a calendar year. Start withholding it in the pay period the employee crosses that threshold and continue through year-end. There is no employer match on the additional tax.
Federal, State, and Local Income Tax
Use each employee’s W-4 with IRS Publication 15 to calculate federal income tax to withhold. Apply the state’s withholding tables in the same way if your state has an income tax. Localities with their own income tax add another layer.
FUTA and SUTA
Federal unemployment tax (FUTA) is paid entirely by the employer. The rate is 6.0% on the first $7,000 of each employee’s annual wages, but if your state unemployment fund is in good standing you receive a credit of up to 5.4%, cutting the effective rate to 0.6%.10Internal Revenue Service. Topic No. 759, Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return States in credit-reduction status shrink that credit and raise your effective FUTA cost.11Internal Revenue Service. FUTA Credit Reduction State unemployment tax (SUTA) is also employer-paid in most states, though a few require employee contributions. The SUTA rate is assigned by the state and adjusts over time.
Wage Garnishments
If you receive a court order or government notice requiring garnishment, you must comply. For most consumer debts, the maximum is the lesser of 25% of disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal minimum wage.12U.S. Department of Labor. Fact Sheet 30: Wage Garnishment Protections of the Consumer Credit Protection Act Child support and alimony orders allow up to 50% or 60% of disposable earnings depending on whether the employee supports another family. Tax levies and bankruptcy orders follow their own rules.
Deposit Payroll Taxes Through EFTPS
After each payroll run you owe the combined employee withholdings (federal income tax, Social Security, and Medicare) plus the employer’s matching FICA share. Deposit these through the Electronic Federal Tax Payment System, the free Treasury platform.13Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System
Deposit frequency depends on your total tax liability during a four-quarter lookback period. If you reported $50,000 or less, you deposit monthly by the 15th of the following month. Above $50,000 you follow a semi-weekly schedule with tighter deadlines.14Internal Revenue Service. Instructions for Form 941 New employers without a lookback history usually start monthly.
Late deposits carry escalating penalties, starting at 2% for a deposit 1–5 days late and rising to 15% once the tax remains unpaid after an IRS demand notice.15Internal Revenue Service. Failure to Deposit Penalty EFTPS returns a confirmation number for every deposit. Save them.
File Payroll Tax Returns
Depositing taxes and reporting them are two obligations, not one.
Form 941, Quarterly
Most employers file Form 941 each quarter to report total wages, federal income tax withheld, and both shares of Social Security and Medicare tax.16Internal Revenue Service. About Form 941, Employers Quarterly Federal Tax Return Due dates are April 30, July 31, October 31, and January 31. If your LLC’s total annual payroll tax liability is $1,000 or less, you may qualify to file Form 944 once a year instead.17Internal Revenue Service. About Form 944, Employers Annual Federal Tax Return
Form 940, Annual
Form 940 reports FUTA tax for the year and is due January 31. If your FUTA liability exceeds $500 in any quarter, you must deposit the tax by the end of the following month rather than waiting for the annual return.
State Returns
State agencies typically want quarterly unemployment insurance reports and periodic income tax withholding returns. Deadlines and formats vary; confirm the schedule with your state revenue department and workforce agency.
Late Filing
Filing a federal payroll return late triggers a penalty of 5% of the unpaid tax per month or partial month, capped at 25%.18Internal Revenue Service. Failure to File Penalty This is separate from the deposit penalties, so a single tax period can generate both.
Post Required Notices, Carry Workers’ Comp, and Keep Records
Federal law requires you to display workplace posters covering employee rights under the Fair Labor Standards Act, the Family and Medical Leave Act, the Occupational Safety and Health Act, and the Employee Polygraph Protection Act.19U.S. Department of Labor. Workplace Posters Most states add posters on state minimum wage, workers’ compensation rights, and anti-discrimination protections. The Department of Labor offers a free poster advisor tool.
Nearly every state requires workers’ compensation insurance covering medical costs and lost wages for on-the-job injuries. Requirements vary; some states exempt very small employers or certain industries, and a handful make coverage optional. Contact your state’s workers’ compensation board or department of insurance for specifics. Premiums are based on industry classification, payroll size, and claims history.
The IRS requires you to keep all employment tax records for at least four years after filing the fourth-quarter return for the year.20Internal Revenue Service. Employment Tax Recordkeeping That includes filed returns (941s, 940s, W-2s, W-3s), deposit records and confirmation numbers, W-4s, and wage documentation. Some states require six or seven years; keep records for the longer of the two. Organize by tax year and quarter, digitally or physically. If an audit comes, organized records with deposit confirmations resolve it fastest.
The Trust Fund Recovery Penalty Reaches You Personally
LLC members often assume limited liability shields them from payroll tax problems. It does not. Federal law imposes a “trust fund recovery penalty” on any person responsible for collecting and paying over payroll taxes who willfully fails to do so. The penalty is 100% of the unpaid tax, and the IRS can pursue that amount from you personally, bypassing the LLC.21Office of the Law Revision Counsel. 26 U.S. Code 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
The taxes at risk are the trust fund portion: federal income tax and the employee share of FICA that you withhold from paychecks. Once withheld, that money belongs to the government; you are holding it in trust. If the LLC falls behind, the IRS can hold individual owners, officers, and even bookkeepers personally responsible. That is why the deposit schedule and record-keeping matter from your first payroll run, not the first audit.