Should The Business Owner Be On Payroll?

Understanding whether a business owner should be on payroll depends on your business structure, tax strategy, and federal and state requirements.

This depends on your business structure:

• If the company is a sole proprietorship or a partnership, there is no need to be on payroll.

• An LLC Owner would normally not be on payroll. Generally, an LLC’s owners cannot be considered employees of their company nor can they receive compensation in the form of wages and salaries.  Instead, a single-member LLC’s owner is treated as a sole proprietor for tax purposes, and owners of a multi-member LLC are treated as partners in a general partnership.

• The owner of a single-member LLC withdraws money by taking an “owner’s draw”—writing themselves a business check or (if their bank allows it) transferring money from the LLC bank account to the owner’s personal bank account.

Note: Owner’s draws from an LLC are NOT paychecks. No federal or state income taxes nor Social Security and Medicare taxes are withheld from those payments. Under most circumstances, LLC members must make estimated tax payments every quarter to cover taxes due on their share of the LLC’s profits. The profits are taxed the same (whether they are taken as personal draws or remain in the business’s bank account).

• If the company is an S corp, the owner(s) have to be on payroll legally.  The IRS could notice if you don’t pay yourself a payroll. The IRS requires S Corp shareholder-employees to pay themselves a reasonable employee salary, which means at least what other businesses pay for similar services. And if the IRS finds out that you tried to evade payroll taxes by disguising employee salary as corporate distributions, they will have something to say about it.

An S Corp’s remaining profits are paid out in distributions to the company’s shareholders, who then report those distributions on their personal income tax returns. Unlike wages and salaries, distributions are not subject to payroll taxes.

Most CPA’s will recommend paying yourself around half of what you pay yourself total, as payroll and the rest can be distributions. Ask your CPA for your specific tax situation. 

• If the company is a C Corp, There is no requirement that the corporation pays them a salary. However, if they do accept payment for their services, the IRS has issued some guidelines that the team should follow. The IRS has said that if a C corporation is distributing profits to its owners and has not hired any other employees, it should follow the 60/40 rule. This rule states that 60 percent of the distribution should be treated as salary—and thus subject to payroll taxes—and the remaining 40 percent as dividends. Please let us know if you need any help getting set up on payroll for your company.

Every small business must consider whether the business owner should be on payroll to ensure proper tax compliance and avoid penalties.

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Sincerely,
Maya Weinreb | Founder & CEO
813-336-1574

 

Frequently Asked Questions

Should a business owner be on payroll?

Whether a business owner should be on payroll depends on the business structure. Sole proprietors and many LLC owners typically are not employees, while S Corporation owners who work in the business are generally required to receive wages through payroll.

Can an LLC owner put themselves on payroll?

Generally, LLC owners taxed as sole proprietors or partnerships do not receive wages through payroll. Instead, they typically take owner’s draws or distributions from business profits. An LLC that elects S Corporation taxation may require the working owner to be placed on payroll.

Do S Corporation owners have to be on payroll?

Yes. S Corporation shareholder-employees who provide services to the company are generally required by the IRS to receive reasonable compensation through payroll before taking profit distributions.

What is the difference between an owner’s draw and a paycheck?

An owner’s draw is a withdrawal of business profits by an owner and does not include payroll tax withholding. A paycheck is employee compensation that includes payroll processing, tax withholding, and reporting requirements.

How should a business owner determine a reasonable salary?

A reasonable salary should be based on factors such as the owner’s duties, industry standards, experience, location, time spent working, and the compensation someone else would receive for similar work.

Why is proper payroll setup important for business owners?

Proper payroll setup helps business owners comply with tax rules, avoid IRS penalties, accurately report income, and ensure compensation is structured correctly for their business entity.