LLC and Payroll

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An LLC must keep accurate records of hours worked by hourly employees.
An LLC must keep accurate records of hours worked by hourly employees. (Image: Igor Dimovski/iStock/Getty Images)

An owner of a limited liability company, or LLC, is paid like an independent contractor, not an employee. If everyone who works for an LLC is an owner of the company, the company does not have any employees, according to the Internal Revenue Service. This means it doesn't have payroll or payroll tax obligations, either. However, as soon as the company hires its first employee, it takes on the payroll and human resource responsibilities that every employer has.

Types of Employees

Two types of people work for an LLC: members and nonmembers. The members collectively own the company. When a member joins the company, he usually makes a financial investment in it and receives membership interests in the company. Nonmembers are employees who work for the company. Whether they are hired full time or part time, employees are paid through payroll. In some circumstances, a company might engage with an independent contractor and pay the contractor through accounts payable.

Employer Payoll Responsibilities

A limited liability company with employees has the same employer payroll responsibilities as every other company. These responsibilities include:

  • Withholding federal, state and local taxes, if applicable, on behalf of employees.
  • Depositing the taxes in a bank account according to Internal Revenue Service regulations.
  • Filing a quarterly tax return and paying withheld taxes to the government.
  • Sending a Form W-2 to employees, summarizing their annual earnings and taxes withheld.

Mandatory Employer Contributions

An LLC with employees is also obligated to contribute toward three mandatory employee benefits: Social Security, Medicare and unemployment compensation. Every company must pay an additional 6.2 percent of an employee's pay up to an annual maximum for Social Security; 1.45 percent of an employee's pay for Medicare, plus an additional 0.9 percent for highly compensated individuals; and additional taxes for federal and state unemployment compensation insurance. These employer payroll taxes must be deposited in the bank with the taxes withheld from employees and included on the company's quarterly tax return.

Guaranteed Payments

LLC owners are not employees, but the company can provide a guaranteed payment to compensate them for the work they perform for the company. Like a salary, the payment is guaranteed because it's not contingent on company performance. However, it's paid outside of payroll, as if a member were an independent contractor. For income tax purposes, LLC members are considered self-employed. They must pay income tax quarterly and file an annual income tax return. Company members also pay a self-employment tax, similar to the Social Security and Medicare taxes withheld from employees. This tax treatment relieves the company of payroll responsibilities and shifts the income tax burden to its members.

Capital Account Withdrawals or Distributions

Each member has a capital account that tracks her investment in the company. At the end of each year, the company distributes the profit or loss by updating each member's account. Members can then withdraw from their capital accounts according to the rules in the company's operating agreement. Since members already paid tax on the money in their capital accounts, distributions aren't typically subject to self-employment tax. Companies are not permitted, however, to disguise guaranteed payments as capital account distributions to lower a member's tax burden.

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