An important growing pain for every LLC owner is this question: when should you pay payroll tax?
If you have employees or are an employee of your LLC then you must pay payroll taxes. If you are not a W2 employee of your LLC then you do not pay payroll tax, but something similar called Self Employment taxes.
A simplified explanation like this can leave many business owners with more questions than answers. To clear this up let's dive into some of the most common situations for LLCs and how much payroll tax withholding can cost.
Contents
Payroll Tax
An unofficial name for the group of taxes paid by employees each time they take a salary or wage. These taxes are withheld from employee paychecks by their employer.
Payroll taxes are levied on employees and their employers who are both responsible for this basket of taxes. Now when I say “employee” I’m referring to someone you’ve hired for your business (this can be yourself in some cases). This implies you’re making use of common IRS forms like a W-2, W-4, and 941.
Do the Self Employed Have Payroll Tax?
The following applies if you’re a single member of a regular LLC or sole proprietorship and you’re actively involved in running your business. This also includes groups like freelancers, contractors, and 1099s.
No, you do not pay any payroll taxes unless you hired an employee. However you’ll pay something similar called self employment tax on your income.
Do Partnerships Have Payroll Tax?
This applies to regular multi-member LLCs and partnerships where you are actively involved in running the business. This assumes you have not hired any employees.
No, you do not pay any payroll taxes unless you hired an employee. However you’ll pay something similar called self employment tax on all your partnership income.
Do Regular LLCs Have Payroll Tax?
This is just to reiterate the information above for those of you running an LLC that you have not changed the tax classification of (more on this later). A regular LLC is known to the IRS as a disregarded entity and all the income will pass-through to active members as self employment income.
No, you do not pay any payroll taxes unless you hired an employee. However you’ll pay something similar called self employment tax on all this income.
Do Holding LLCs Have Payroll Tax?
For those of you who are members of a holding LLC with a regular (disregarded) tax classification:
No, you do not pay any payroll taxes unless the LLC hires an employee. However you’ll have to pay any necessary taxes on the passive income you receive as a passive shareholder.
Holding LLC
Is simply an entity which owns other companies (subsidiaries) and valuable assets (thanks to Wyoming Trust & LLC Attorney for the definition
Do S Corps Have Payroll Tax?
This applies to LLCs that have opted into being taxed as an S Corporation in which you're an active member. If you're not sure if your LLC is an S Corp please be aware that this is something you must opt into and won't apply unless you’ve made changes to your LLC.
Yes, you’ll have to pay payroll taxes on your salary and on any other employee’s salaries.
As an S Corp member you’ll likely be taking an W-2 salary as a way of avoiding expensive self employment taxes. This means you’ll unfortunately now be hitting all the payroll takes on your earned income. Your profit distributions will luckily avoid all payroll taxes.
Do C Corps Have Payroll Tax?
This applies to LLCs that have elected to be taxed as corporations (C-Corps) by the IRS. This is another tax classification that LLCs need to explicitly opt into, because by default they are pass-through entities.
Yes, you’ll have to pay payroll taxes on your salary and on any other employee’s salaries.
C-Corps, like S-Corps, have two primary ways of compensating owners: employee salaries and dividends. If you’re actively involved in your C-Corp and taking a salary then you have to pay payroll taxes on that income. However your dividends will not pay any of those payroll taxes.
Do Investors Have Payroll Tax?
This applies to all types of LLCs, whether they are taxed as a disregarded pass-through entity, S-Corp, or C-Corp. Some members of the LLC may not be actively involved in the day to day operations of the company and are considered passive shareholders. For these members:
No, you do not pay any payroll taxes.
This will be treated as “passive income” not an employee salary. It’s worth noting that when investing in LLCs you’re sure you meet and maintain all the criteria to preserve your status as a passive shareholder.
How Much Payroll Taxes Cost
Hopefully you have a good idea if you’ll owe payroll taxes at this point, now let’s discuss how much typically you’ll withhold from each employee’s paycheck. As mentioned previously this depends on location, personal situation, and other factors. If that sounds tricky it’s because:
Payroll taxes are an evolving and inherently complex topic that should not be taken lightly.
The following should be considered estimates, not real amounts, as they do not factor in necessary information. Please consult with a tax professional and use payroll software to do this properly!
For this example we’ll be getting some payroll tax estimates for an employee earning an annual salary of $50,000 as a single filer and having no other income. I was able to get these estimates using some helpful free calculators from: Gusto and PaycheckCity.
Here’s what the payroll tax withholding for this employee look like in six different states:
California: $10,359 - $11,998.12
Florida: $8,140 - $9,779
Indiana: $10,427 - $11,394
Kentucky: $10,507 - $12,146
Massachusetts: $10,729 - $12,368
Texas: $9,779 - $11,377
As you can see each state has a range because the estimates you’ll get from payroll calculators can vary. The reasons for this can be as simple as some including local taxes, being more up to date with latest taxes, and many other factors. Bottom line: verify your payroll software is as accurate as possible.
All we can say for sure is that running payroll is a complicated beast in an ever changing environment. For this reason you’ll need to ensure you’re handling it properly.
How to Pay Payroll Taxes
Due to the complexity managing compliance and withholding of payroll taxes for each employee, many LLCs use a payroll service. Here is a list of popular payroll services, which you should research for your own unique situation:
Gusto
PaycheckCity
SurePayroll
Onpay
Patriot Software
And many more
Please note that I'm not recommending any of these services or that you even run your own payroll (especially if you have no prior experience). The software above is just examples of tools professionals use to manage payroll's complexity.
An alternative to using payroll software yourself is to have your accountant or CPA handle this for you. Check with your tax professional to see if this is a service they offer. If you don’t want to deal with the problem of running payroll (and I don’t blame you) this is your best option!
Key Takeaway
What payroll tax boils down to is one fundamental question: does your LLC have any employees? If not then you’ve dodged a bullet, however If you do then you’re very likely going to have to pay payroll taxes. At least now you’ll know how to handle them.
