Can I Pay Myself a W-2 From My LLC?

Whether a Limited Liability Company (LLC) owner can receive a W-2 wage depends on how the business is classified for tax purposes by the Internal Revenue Service (IRS), not its legal formation as an LLC. The structure of an LLC provides flexibility in how it can be taxed, and this status determines an owner’s eligibility to be an employee for payroll purposes.

By default, the IRS does not view an LLC owner as an employee, which precludes the issuance of a W-2. However, an LLC can elect to change its tax classification to that of a corporation. This formal election allows an owner who actively works in the business to be paid a salary, complete with tax withholdings and a Form W-2.

Owner Payments in Default LLC Structures

For a single-member LLC, the default classification is a “disregarded entity,” meaning the IRS treats it as a sole proprietorship for income tax purposes. Under this structure, the owner cannot be an employee and therefore cannot receive a W-2. Instead, the owner takes money out of the business through an “owner’s draw,” which is a withdrawal of company profits, not a salary.

An owner’s draw does not have taxes withheld at the time of payment. The owner is responsible for paying income tax and self-employment taxes on all the net profits of the business, regardless of how much money they draw. These taxes are paid through quarterly estimated tax payments and cover Social Security and Medicare contributions.

For an LLC with two or more members, the default tax classification is a partnership. In this arrangement, the owners, or members, are considered partners, not employees, and cannot be issued a W-2. Partners are compensated through “guaranteed payments” for services and “distributions” of their share of the company’s profits, as detailed in the partnership’s operating agreement.

Similar to a sole proprietor, partners are responsible for their own tax obligations on their entire share of the partnership’s income, which is reported to them on a Schedule K-1 (Form 1065). This income is subject to both regular income tax and self-employment taxes. Under the default IRS rules for both single and multi-member LLCs, owners are not employees and are ineligible for W-2 wages.

Electing Corporate Taxation for W-2 Eligibility

For an LLC owner to become eligible to receive a W-2 salary, the business must change its tax classification with the IRS by electing to be taxed as a corporation. This election alters the tax relationship between the owner and the company, allowing an owner who provides services to be classified as an employee. An LLC can choose to be taxed as either an S corporation or a C corporation.

The most common path for small businesses is the S corporation election. A requirement of operating as an S corp is that any owner who actively works for the business must be paid a “reasonable salary” through a formal payroll system, resulting in a W-2. This salary is subject to standard payroll taxes. Any remaining profits can then be passed through to the owner as distributions, which are not subject to self-employment or payroll taxes.

Alternatively, an LLC can elect to be taxed as a C corporation by filing Form 8832. This structure also permits an owner-employee to be paid a W-2 salary. This option is less common for smaller LLCs because of double taxation, where the corporation pays income tax on its profits, and the owner then pays personal income tax on the salary and any dividends received.

Information and Documentation for S Corp Election

To change an LLC’s tax status to an S corporation, the business must file Form 2553, Election by a Small Business Corporation, with the IRS. This requires the LLC’s legal name, address, and its Employer Identification Number (EIN). The date the LLC was legally formed and the state of formation are also required.

You will also need to provide personal details for every owner, who is considered a shareholder under this new structure. This includes the full name, address, and Social Security Number for each shareholder. The form requires each shareholder’s ownership percentage and the tax year they follow.

A decision to make before filing is determining the effective date for the S corp election. The election must be made no more than two months and 15 days after the beginning of the tax year for it to apply to that same year. All shareholders must provide their signature on the form.

The S Corp Election Filing Process

Once Form 2553 is completed and signed, it must be submitted to the IRS. The form cannot be filed electronically and must be sent via mail or fax. The specific IRS service center address or fax number to use depends on the state where the LLC’s principal business is located, as listed in the form’s instructions.

After submitting the form, the IRS will review the election to ensure the LLC meets all eligibility requirements for S corporation status. These requirements include being a domestic entity, having no more than 100 shareholders, and having only one class of stock.

If the election is approved, the IRS will send a confirmation notice. This notification confirms the acceptance of the S corporation election and states the effective date of the new tax status. The IRS states it will send this notice within 60 days of receiving Form 2553, but processing times can vary. If you do not receive a response within this timeframe, you can contact the IRS.

Payroll Responsibilities for Corporate-Taxed LLCs

Upon approval of the S corp election, the LLC must begin treating the owner-employee’s compensation as a formal salary. An ongoing responsibility is the determination of “reasonable compensation.” The IRS requires that the salary paid to an owner-employee be comparable to what other businesses in the same industry would pay for similar services. Factors influencing this amount include:

• The owner’s experience
• Their duties and responsibilities
• The time devoted to the business
• Compensation paid to non-shareholder employees

With a reasonable salary established, the LLC must set up a formal payroll system. This involves calculating and processing regular paychecks. Many businesses use payroll software or a third-party service provider to manage these tasks and ensure compliance.

Operating payroll creates tax obligations for the business. The LLC is responsible for withholding taxes from the owner’s W-2 salary, including federal and state income taxes, as well as the employee’s share of Social Security and Medicare (FICA) taxes. The LLC must also pay the employer’s matching share of FICA taxes, Federal Unemployment Tax (FUTA), and any state unemployment taxes (SUTA). These employer-paid taxes are an additional business expense.

Payroll tax deposits must be made to the IRS on a set schedule, either semi-weekly or monthly, depending on the size of the payroll. The LLC must also file quarterly payroll tax returns, such as Form 941, to report the wages paid and taxes deposited. Annually, the business must provide the owner-employee with a Form W-2 summarizing their total wages and withholdings for the year.