Payroll involves far more than just cutting a paycheck to employees. It entails calculating work hours, wages, salaries, benefits, wage garnishments, and withholding and paying employment-related taxes. So, what do business owners need to know about setting up payroll for an LLC or corporation? In today’s post, we’ll cover all of this and more.
Seven Key Steps for Getting Started
The account registrations needed, steps necessary, and forms required to set up and administer payroll are similar regardless of the business entity type. My recent article, What Is Payroll? offers detailed information to help you understand everything that goes into payroll responsibilities.
- Obtain an EIN.
- Apply for State and Local Tax ID Numbers — including a state unemployment tax ID, if required in the state.
- Set up a payroll bank account. Some businesses find it beneficial to use a separate bank account for payroll purposes rather than use their primary business bank account for payroll expenses.
- Decide on a payroll schedule. Common schedules include weekly, bi-weekly, semi-monthly, and monthly. Some states may require specific frequencies under different circumstances.
- Get a workers’ compensation insurance policy.
- Determine what optional employee benefits you’d like to offer and what portion of costs will be deducted from employee paychecks. These benefits may include common benefits such as health insurance, retirement plans, and educational reimbursements.
- Gather the required documentation from employees. This will include a W-4 form to document their filing status and track personal allowances to determine the percentage of payroll taxes to be withheld from their paychecks.
Types of Payroll Deductions
Any business that hires employees must register to pay payroll taxes in the state(s) where it has employees. The requirements and processes are essentially the same regardless of a business’s legal structure. However, payroll tax rules vary from state to state, which can become confusing (especially for employers with remote employees in states other than where their company is located). Business owners need to educate themselves, ideally enlisting the help of a payroll specialist or accountant, to gain an understanding of the payroll taxes and other withholdings they will be responsible for.
The following payroll taxes and withholdings may apply to Limited Liability Companies (LLCs) and C Corporations depending on the business location, where employees are based, and other factors:
- Federal income tax – Withheld from employees’ paychecks.
- State income tax – Withheld from employees’ paychecks.
- Local income tax – Withheld from employees’ paychecks.
- FICA – Social Security and Medicare Taxes. (Half is withheld from employees’ paychecks and the employer pays the other half.)
- State and local payroll taxes – Some might be withheld from employees’ pay while others might be paid by employer.
- Unemployment taxes – FUTA (Federal unemployment tax is paid by employer and not withheld from employee paychecks.); SUTA (State unemployment tax is typically paid by employers and not withheld from employee paychecks. Also known as “SUI,” state unemployment insurance.)
- Workers’ compensation insurance – Paid by employer, not deducted from employee paychecks.
- Employee wage garnishments – Withheld from employees’ paychecks.
- Benefits and other voluntary deductions from employee pay.
Steps for State Payroll Tax Registration
As I mentioned before, state and local governments will vary in their requirements, and their registration processes to set up tax accounts and obtain ID numbers.
Basically, employers must:
- Determine the tax agencies the business must report and make payments to.
- Complete and submit the required tax account application forms.
An LLC’s or C Corporation’s Employer Identification Number (EIN) is used for reporting and paying federal payroll taxes, which includes federal income tax and federal unemployment (FUTA).
The types of state payroll-related accounts and IDs required vary.
CorpNet offers payroll registration services in all 50 states, and we partner with Gusto, a full-service payroll and HR platform, to help its customers. Gusto’s website provides helpful information about registering for employment-related tax accounts in each individual state:
- Tax agencies for state income tax, unemployment tax, and local taxes
- Steps for registering for a state income tax withholding account
- State unemployment tax liability criteria and registration process
- Steps to register for local tax accounts
Using a resource like Gusto for payroll management can simplify the entire process from setting up state and local tax accounts to paying employees, withholding taxes, and remitting monies to the appropriate tax authorities and other government agencies to maintaining an accurate payroll register (a.k.a. payroll recordkeeping).
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.
Ready to simplify state payroll tax registration for your LLC or Corporation? CorpNet is here to help! Contact us for a no-obligation consultation.
