How to Put Myself on Payroll | Lovie — US Company Formation

As a business owner, figuring out how to pay yourself is a critical step in managing your company's finances and ensuring compliance. It's not as simple as taking money out of the bank; the method you choose impacts taxes, legal standing, and personal financial planning. Understanding the differences between an owner's draw and a salary, and the specific rules for different business structures like LLCs, S-Corps, and C-Corps, is vital. This guide will walk you through the process of setting up payroll for yourself, covering the necessary steps, legal considerations, and how your business structure influences your options. Whether you're operating as a sole proprietor, an LLC, an S-Corp, or a C-Corp, there are specific requirements you need to meet to pay yourself correctly and avoid potential penalties from the IRS. Proper payroll setup ensures you're meeting tax obligations and maintaining the integrity of your business finances.

Understanding Your Payroll Options: Salary vs. Owner's Draw

The first step in putting yourself on payroll is understanding the fundamental difference between a salary and an owner's draw. This distinction is crucial and largely depends on your business's legal structure. For sole proprietors and partners in general partnerships, 'payroll' isn't technically applicable. Instead, owners take 'owner's draws,' which are simply distributions of business profits directly to the owner. There are no taxes withheld at the time of the draw, and it's not considered

Owner's draws are for sole proprietors, partners, and default LLCs.
Salaries are required for employees and owners of C-Corps and S-Corp taxed entities.
S-Corp owners must pay themselves a 'reasonable salary' subject to payroll taxes.
Owner's draws are distributions of profit; salaries are business expenses.

Setting Up Payroll for Yourself as an LLC Owner

If your LLC is taxed as a sole proprietorship or partnership (default status), you will take owner's draws. This process is straightforward: you simply withdraw funds from your business bank account. However, it's crucial to maintain clear records of these draws. They should be recorded as distributions of profit, not as business expenses. This ensures accurate profit reporting on your personal tax return. For example, if your LLC is registered in Delaware, you still follow these principles rega

Default LLCs use owner's draws, recorded as profit distributions.
S-Corp taxed LLCs require a formal payroll with a reasonable salary.
Obtain an EIN, determine a reasonable salary, and use payroll software/service.
Remit payroll taxes quarterly and file required federal and state tax forms.

Running Payroll for S-Corp and C-Corp Owners

For S-Corporations, putting yourself on payroll means adhering strictly to IRS guidelines for owner compensation. As mentioned, you must pay yourself a reasonable salary. This salary is subject to federal income tax withholding, Social Security tax (6.2% employee, 6.2% employer), and Medicare tax (1.45% employee, 1.45% employer). State income tax withholding will also apply if your state has an income tax. For example, if you're an S-Corp owner in Ohio, you'll need to account for Ohio state inco

S-Corp owners must pay a reasonable salary subject to FICA taxes.
S-Corp distributions are not subject to FICA taxes.
C-Corp owners are employees receiving a salary and are subject to double taxation.
Ensure salary is reasonable to avoid IRS penalties for S-Corps.

Essential Steps to Set Up Your Payroll

Setting up payroll for yourself involves a systematic approach to ensure accuracy and compliance. The very first step, regardless of your business structure (LLC, S-Corp, C-Corp), is to obtain an Employer Identification Number (EIN) from the IRS. You can apply for an EIN online, free of charge, through the IRS website. This nine-digit number is your business's federal tax ID and is essential for reporting payroll taxes. Even if you're a sole owner, an EIN is often required, especially if you pla

Obtain an EIN from the IRS.
Register with your state's tax agencies for state-specific payroll taxes.
Choose a payroll software or service for accurate tax calculations and filings.
Consult a tax professional to ensure compliance.

Understanding Tax Implications and Filing Requirements

Putting yourself on payroll involves significant tax implications that vary based on your business structure. For sole proprietors and default LLCs taking owner's draws, the 'payroll' is essentially a distribution of net business income. This income is reported on Schedule C of your personal Form 1040 and is subject to both ordinary income tax and self-employment taxes (Social Security and Medicare). Self-employment tax for 2024 is 15.3% on the first $168,600 of net earnings from self-employment

Owner's draws are subject to income and self-employment taxes.
S-Corp salaries are subject to payroll taxes; distributions are not.
C-Corp owners receive salaries (subject to payroll taxes) and potentially dividends (subject to income tax).
Accurate record-keeping and timely filing of forms like 941, W-2, 1120 are essential.

Frequently Asked Questions

Can I pay myself a salary as an LLC owner?: Yes, if your LLC is taxed as an S-Corp or C-Corp. As a default LLC (taxed as a sole proprietorship or partnership), you take owner's draws, not a salary. An S-Corp election requires a reasonable salary; a C-Corp treats you as an employee with a salary.
What is a 'reasonable salary' for an S-Corp owner?: A 'reasonable salary' is what you would pay a non-owner employee for similar services in your industry and location. The IRS considers factors like your duties, experience, and the business's profitability. There's no single figure; it requires careful research and justification.
Do I need an EIN to pay myself?: Yes, if your business is structured as an S-Corp or C-Corp, you absolutely need an EIN to run payroll and pay yourself a salary. Even for sole proprietors or default LLCs, an EIN is generally recommended for opening business bank accounts and establishing financial separation.
How often should I pay myself?: For S-Corp and C-Corp owners, salaries are typically paid on a regular schedule, such as bi-weekly or monthly, similar to other employees. Owner's draws for default LLCs can be taken more flexibly, but consistent record-keeping is key.
What happens if I don't pay myself correctly?: Incorrectly paying yourself can lead to IRS penalties, back taxes, interest, and audits. For S-Corps, not paying a reasonable salary can result in distributions being reclassified as wages. For C-Corps, misclassifying yourself can create compliance issues.

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