Can an Owner of an LLC Be on Payroll?

Limited Liability Companies (LLCs) offer business owners a flexible structure that combines the liability protection of a corporation with the tax efficiencies often associated with partnerships or sole proprietorships. This adaptability makes LLCs a popular choice for many entrepreneurs. A common question arising from this flexibility concerns how an LLC owner can receive compensation for their work in the business. The method of compensation largely depends on the LLC’s tax classification, impacting both the owner and the business itself.

Understanding LLC Taxation and Owner Compensation

The default tax treatment for an LLC influences how its owners are compensated. The Internal Revenue Service (IRS) categorizes LLCs based on the number of owners, or “members.” This classification determines whether an owner can be on payroll or receives compensation through other means.

For a single-member LLC, the entity is treated as a “disregarded entity” for federal income tax purposes. This means the IRS views the LLC’s activities as part of the owner’s personal tax return, with income and expenses reported on Schedule C of the owner’s Form 1040. The owner is considered self-employed, not an employee, and cannot receive a W-2 salary.

Instead, they take “owner’s draws” or “distributions” from profits for personal use. These draws do not reduce the LLC’s taxable income. The owner pays self-employment taxes, covering Social Security and Medicare, on the net earnings. The self-employment tax rate is 15.3%, applied to 92.35% of net earnings.

Multi-member LLCs are taxed as partnerships by the IRS. The LLC does not pay federal income tax; instead, it files Form 1065. Each member receives a Schedule K-1, reporting their share of profits and losses. Similar to single-member LLCs, members are considered partners, not employees, and receive compensation through guaranteed payments or distributions. These payments are also subject to self-employment taxes on the member’s entire share of the LLC’s income.

Electing Corporate Tax Status for Owner Payroll

An LLC owner can be on payroll, but this requires the LLC to elect corporate tax status. This election changes the federal income tax treatment, allowing owners who actively work in the business to be classified as employees. The two primary corporate tax elections are S-corporation (S-corp) and C-corporation (C-corp) status.

Electing S-corporation status allows LLCs to put owners on payroll while potentially reducing self-employment tax liability. An LLC elects S-corp status by filing Form 2553 with the IRS. Under this election, any owner actively working for the business must be paid a “reasonable salary” via W-2 payroll. This salary is subject to federal income tax withholding and FICA taxes (Social Security and Medicare), split between the employer and employee.

For 2025, the FICA tax rate is 15.3%, with 6.2% for Social Security on wages up to $176,100 and 1.45% for Medicare on all wages. Remaining profits after the salary can be distributed to the owner as tax-free distributions, avoiding additional self-employment taxes. A “reasonable salary” considers what a comparable position would pay in the market.

An LLC can elect C-corporation status by filing Form 8832. Under this structure, the LLC is treated as a separate legal and tax entity, and the owner can be an employee receiving a W-2 salary. This salary is also subject to income tax withholding and FICA taxes, similar to an S-corp. A distinction of a C-corp is “double taxation,” where corporate profits are taxed at the corporate level, and then dividends are taxed again at the individual shareholder level.

Though less common for small LLCs, C-corp status remains a viable option for placing an owner on payroll. For both S-corp and C-corp elections, the LLC must obtain an EIN, establish a payroll system, and comply with all federal and state payroll tax obligations, including withholding income taxes and FICA.

Implications of Owner Payroll Versus Distributions

The choice between compensating an LLC owner via payroll or distributions carries distinct tax and administrative implications. Understanding these differences helps business owners make informed decisions about their compensation structure.

From a tax perspective, the difference lies in the application of FICA or self-employment taxes. In default LLC structures (single-member as sole proprietorship, multi-member as partnership), the owner’s entire net business income is subject to the full 15.3% self-employment tax for Social Security and Medicare. When an LLC elects S-corp status, only the “reasonable salary” paid to the owner is subject to FICA taxes, with employer and employee each paying half.

Distributions beyond this salary are not subject to FICA, offering potential tax savings. Owners receiving a W-2 salary have income tax and FICA taxes withheld from each paycheck. Owners relying solely on distributions must make quarterly estimated tax payments for both income tax and self-employment tax.

Administrative and operational considerations also differ. Running payroll involves a higher administrative burden compared to owner’s draws. Payroll necessitates accurate record-keeping, timely calculation and remittance of payroll taxes, and filing various forms. Owner’s draws offer simplicity and flexibility, but lack the predictability and formal structure of a payroll system. Being an employee through an S-corp or C-corp election may allow the owner to access certain pre-tax fringe benefits, such as health insurance premiums, which can be deductible by the company and non-taxable to the employee.