Corporation and LLC Payroll FAQs
Corporation and LLC Payroll FAQs
While setting up payroll and registering for payroll taxes are generally the same for all business entity types, owners of LLCs and corporations may wonder about how the rules affect them personally. They might also have other questions related to their business structure.
Can an Owner of an LLC Be on the Payroll?
Generally, no. An LLC is considered a “disregarded entity” and taxed as either a Sole Proprietorship (one owner) or a Partnership (multiple owners). Owners are paid in draws or distributions from the business profits and may not be on the payroll. So, an LLC must complete payroll tax registration only if the business hires employees.
However, if the LLC meets eligibility requirements and files for S Corporation election, then LLC members who work in the business must be put on the payroll and paid like employees. Therefore, the company must register for tax accounts with the state and local government agencies.
LLCs that opt for S Corporation tax treatment must not pay their members wages or salaries that are below what’s reasonable for the work they perform. This also applies to shareholders of C Corporations that elect to be taxed as S Corporations. The IRS is on the watch for that!
Some LLCs have faced penalties for paying themselves excessively low wages and taking the rest of their compensation as profit distributions in order to decrease their Social Security and Medicare tax burden. Wages and salaries are subject to those taxes in addition to income tax, while only income tax applies to profit distributions.
Can a C Corporation’s Shareholders Be on the Payroll?
Yes, shareholders may pay themselves via payroll for services rendered in running the business. Even if a corporation has no other employees, it must register for payroll taxes if one or more of its shareholders are on the company’s payroll.
It’s critical that shareholders on payroll pay themselves reasonable compensation for the work performed. Because wages and salaries are tax-deductible expenses for the business, the IRS requires that compensation paid to shareholders through payroll is not beyond a reasonable wage or salary for the work those individuals do for the business. This stipulation is meant to prevent business owners from gaming the system by paying themselves exorbitant salaries and low distributions (a.k.a. dividends, which are not tax-deductible) to lower their corporate taxable income.
Are Payroll Taxes Deductible for Corporations and LLCs?
Not only are wages and salaries tax-deductible business expenses, but also any employer-paid portion of payroll taxes may be deducted on LLCs’ and corporations’ tax returns. Tax amounts withheld from employees’ pay are not a deductible expense for the business because the employee rather than the employer has paid those dollars.
Where to Turn for Assistance
Payroll for LLCs, corporations, and business entities of all types can be complex. Misunderstanding the requirements, miscalculating any of the components involved, missing deadlines, and failing to fulfill any other compliance obligations can result in costly fines, penalties, legal actions, or worse. It’s important for business owners to enlist the expertise of qualified professionals — such as human resources, accounting, and payroll specialists — who can guide them through the process of setting up and managing all aspects of their payroll.
Excerpt by Nellie Akalp
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Maya Weinreb | Founder & CEO