How to Pay an Employee From an LLC

Paying employees from an LLC requires a structured process for setup, wage calculation, and tax compliance. A proper payroll system prevents legal issues and financial penalties. Understanding employee classification, tax withholding, and reporting helps LLCs manage payroll and maintain federal and state compliance.

Setting Up Your LLC for Payroll

Before paying an employee, an LLC must establish its employer identity. Obtain an Employer Identification Number (EIN) from the IRS using Form SS-4. This unique federal tax ID is for business tax reporting and communications, distinct from personal tax numbers.

Distinguish between employees and independent contractors; misclassification leads to penalties. IRS guidelines consider behavioral and financial control, and the relationship type. If the LLC controls work, provides tools, and the services are core to the business, the individual is likely an employee. Incorrect classification results in unpaid employment taxes, interest, and fines.

Register with state agencies for state unemployment insurance (SUI) and, if applicable, state income tax withholding. These registrations ensure the LLC remits state payroll taxes and contributes to unemployment benefits. Agencies and forms vary by state, but these steps ensure compliant operation.

Consider workers’ compensation insurance, mandated by most states. This insurance benefits employees with job-related injuries or illnesses, protecting them and the LLC from direct costs. Specific coverage requirements, including minimum employee thresholds, are state-determined.

Decide on a payroll management method: internally, with an accountant, or a payroll service. Internal management requires understanding tax laws and reporting deadlines, which is time-consuming. An accountant or payroll service streamlines the process, ensuring accuracy and compliance, though fees vary by employees and services.

Calculating and Paying Employee Wages

After payroll setup, calculate employee wages and determine payment methods. Gross pay, total earnings before deductions, is calculated by hourly wage times hours worked, or a fixed salary for salaried employees.

Deduct federal withholdings from gross pay. Federal Income Tax (FIT) is based on the employee’s Form W-4. Federal Insurance Contributions Act (FICA) taxes, including Social Security and Medicare, are mandatory. Social Security tax is 6.2% for employee and employer on wages up to an annual limit. Medicare tax is 1.45% for both parties with no wage limit.

State and local income tax withholdings may apply, varying by employee residence and LLC location. Deduct these amounts from gross pay per state and local tax tables. Ensure proper registration with state tax authorities for withholdings.

Common pre-tax deductions, like health insurance premiums or 401(k) contributions, reduce taxable income. Post-tax deductions, such as Roth 401(k) contributions or wage garnishments, are taken after taxes. The remaining amount is the employee’s net pay.

Determine a consistent pay frequency: weekly, bi-weekly, semi-monthly, or monthly. Bi-weekly payments (every two weeks) result in 26 pay periods annually. Semi-monthly payments (15th and last day) result in 24 pay periods.

Establish the payment method. Direct deposit is an efficient method, transferring funds directly into the employee’s bank account. Alternatively, issue paper checks or use pay cards, which load wages onto a prepaid debit card. The method should align with employee preferences and LLC capabilities.

Fulfilling Payroll Tax Requirements

LLCs have tax obligations requiring regular deposits and filings with federal and state authorities. Employers must pay their share of FICA taxes, matching the employee’s 6.2% for Social Security and 1.45% for Medicare. These contributions are separate from employee withholdings and represent an additional payroll expense.

The Federal Unemployment Tax Act (FUTA) tax funds unemployment benefits. This employer-paid tax is 6.0% on the first $7,000 of each employee’s wages. A state unemployment tax credit often reduces the effective federal rate to 0.6%. Employers report FUTA tax liability annually on Form 940.

Deposit federal payroll taxes (withheld income tax, FICA, and FUTA) with the U.S. Treasury via the Electronic Federal Tax Payment System (EFTPS). The deposit schedule (monthly or semi-weekly) depends on total tax liability. Most small businesses follow a monthly schedule, with taxes due by the 15th of the month following payroll.

Quarterly, employers must file Form 941, the Employer’s Quarterly Federal Tax Return, with the IRS. This form summarizes total wages paid, federal income tax withheld, and employee and employer FICA taxes for the quarter. It reconciles payroll tax liabilities and payments.

State unemployment tax (SUTA) and state income tax withholding require specific deposit and reporting. SUTA rates and wage bases vary by state and are paid quarterly. State income tax withholding deposits follow state-specific schedules, from monthly to quarterly, often mirroring federal requirements.

At year-end, an LLC must prepare and distribute Form W-2, Wage and Tax Statement, to each employee by January 31. This form reports annual wages, tips, compensation, and withheld federal, state, and local taxes. Concurrently, file Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration, summarizing all W-2 forms.

Maintaining Payroll Records and Compliance

Maintaining thorough payroll records is a continuous responsibility for LLCs. Organized record-keeping demonstrates compliance with federal and state labor and tax regulations. Retain detailed records of wage statements, tax forms, time sheets, and employment agreements for three to four years. Some records, like payroll tax returns, may require up to seven years.

These records provide an audit trail for wages paid, taxes withheld, and employer contributions, reviewable during IRS or state audits. Accurate documentation supports benefit calculations, such as unemployment or workers’ compensation. Regular review helps identify and correct discrepancies.

LLCs are subject to new hire reporting requirements, mandating reporting newly hired or re-hired employees to a state agency, typically within 20 days. This reporting helps state agencies administer child support enforcement and detect unemployment insurance fraud. Reporting methods and required information vary by state.

Comply with federal and state labor laws by displaying certain posters in a prominent, accessible location for all employees. These posters cover minimum wage, occupational safety and health (OSHA), family and medical leave, and equal employment opportunity. Failure to display required posters can result in penalties.

Ongoing compliance involves regularly reviewing and updating employee payroll information. This includes processing new Forms W-4 for withholding changes or marital status, and adjusting wage rates for promotions or raises. Keeping employee data current ensures accurate tax calculations and prevents issues during filings or audits.

Citations

IRS. Independent Contractor (Self-Employed) or Employee? https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee. Accessed August 5, 2025.
IRS. Federal Unemployment Tax Act (FUTA). https://www.irs.gov/businesses/small-businesses-self-employed/federal-unemployment-tax-act-futa. Accessed August 5, 2025.
IRS. Apply for an Employer Identification Number (EIN) Online. https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online. Accessed August 5, 2025.
IRS. Social Security and Medicare Tax Rates. https://www.irs.gov/newsroom/social-security-and-medicare-tax-rates. Accessed August 5, 2025.
IRS. Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. https://www.irs.gov/forms-pubs/about-form-940. Accessed August 5, 2025.
IRS. Form W-4, Employee’s Withholding Certificate. https://www.irs.gov/forms-pubs/about-form-w-4. Accessed August 5, 2025.
IRS. Employment Tax Due Dates. https://www.irs.gov/businesses/small-businesses-self-employed/employment-tax-due-dates. Accessed August 5, 2025.
IRS. Form 941, Employer’s Quarterly Federal Tax Return. https://www.irs.gov/forms-pubs/about-form-941. Accessed August 5, 2025.