Global Payroll — 7 min

How to set up payroll as an LLC: A step-by-step guide

Written by Jonathan Goldsmith

December 20, 2024

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Setting up payroll for your LLC can feel daunting, especially if you’re a small business owner managing everything from hiring to operations. After all, payroll is a critical business function — not just for paying employees but also for maintaining compliance with federal and state laws.

If you’re wondering how to set up payroll for an LLC and manage your payroll taxes, you’re in the right place. In this guide we’ll walk you through all the steps you need to get set up, and show you how using the right tools can save you time, resources, and money.

So let’s jump straight in.

Jump straight to a key chapter

Setting up payroll: What you need to do

Setting up payroll: What you need to do

To set up a payroll system that complies with tax laws and regulations — and enables your business to run smoothly — here are the steps you’ll need to follow:

1. Register your LLC and obtain an EIN

If you haven’t already done so, the first step is to ensure your LLC is properly registered within your state. This legal framework protects your personal assets and establishes your business as an official entity.

Next, you’ll need an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). You can think of this as your business’s Social Security number: a unique identifier required for paying federal taxes and reporting employee earnings.

Applying for an EIN is quick and free, and you can do it directly on the IRS website. If your LLC already has an EIN but has changed ownership or structure, ensure that you inform the IRS.

2. Classify your employees correctly

Before you start running payroll, you need to ensure that your team members are classified correctly. This is because not all workers are classified the same way under US labor laws, and how you pay them will differ.

Employees are entitled to benefits and tax withholdings, while independent contractors are responsible for managing their own taxes.

Employees: These are individuals who work directly for your LLC. You must withhold income tax, Social Security, and Medicare taxes, and — in many cases — provide benefits such as health insurance.
Independent contractors: These are self-employed workers you hire for specific projects or tasks. No tax withholdings are required, but you must file a Form 1099-NEC for any contractor that receives $600 or more from your business per year.

Misclassifying a worker can lead to audits, fines, and legal issues. If you’re unsure about how to classify a worker, consult the IRS’s guidelines — or work with a HR expert like Remote to handle the classification process for you.

Use our Contractor Compliance Checklist to avoid misclassification

Work through this checklist to help determine if a new hire should have a contractor or employee relationship.

A tablet with the title contractor compliance checklist.

3. Choose a payroll system

Payroll can quickly become a time-consuming task, especially for an LLC managing multiple employees. Here are some of the ways you can handle payroll:

Do it manually

If you’re running a small LLC with only one or two employees, manual payroll might seem manageable. However, this method is prone to mistakes and requires you to calculate taxes and deductions manually — something that becomes increasingly complicated as your business grows.

Manual payroll involves calculating employee wages, deductions, and taxes by hand or using spreadsheets.

Advantages

It’s cost-effective for LLCs with very few employees.
You retain full control over every aspect of payroll.
There is no need to purchase payroll-specific software or pay for external services.

Disadvantages

It’s time-consuming, as each pay period requires the manual calculation of taxes, deductions, and net pay.
This manual approach can lead to errors which, in turn, can lead to underpayment, compliance issues, and/or fines.
As your LLC grows and scales, it can become impractical to manage payroll manually.

While manual payroll might work for LLCs with only one or two employees, it’s not a sustainable solution for most small businesses, especially those seeking growth.

Use payroll software

Payroll software is a popular option for LLC owners who want to automate some payroll tasks while retaining control over their operations.

Advantages

It automates repetitive tasks like wage calculations, tax withholding, and direct deposits.
It often includes integration with accounting software like QuickBooks or Xero.
It’s usually affordable for small businesses, with pricing often based on the number of employees.

Disadvantages

Payroll software requires regular updates. Payroll tax laws change frequently, and outdated software can lead to compliance issues.
While user-friendly, software requires some initial setup and ongoing management.
Many software options offer minimal customer service, leaving you to resolve complex tax or payroll issues on your own.

Payroll software can be suitable for LLCs that want to streamline their payroll processes, but still handle some aspects of payroll management in-house.

Use a full-service payroll solution

For LLC owners looking for a hands-off approach, full-service providers — like Remote Payroll — offer end-to-end payroll management. These services handle everything from tax calculations and filings to compliance monitoring and payments.

Advantages

Remote Payroll ensures that all federal, state, and local taxes are calculated and filed accurately, keeping your LLC compliant with the latest regulations.
Everything is automated, so you don’t need to worry about keeping up with tax law changes, performing calculations, or filing payroll taxes.
Full-service payroll is perfect for LLCs planning to grow, as it can handle additional employees, multiple locations, and even international hires.
There is full support from local, in-house specialists.

Disadvantages

There’s less hands-on control, which may not suit LLC owners who prefer to oversee every detail.

This approach is especially beneficial for small businesses aiming to streamline operations without sacrificing accuracy or compliance. It’s a great choice if you want to focus on growing your LLC rather than worrying about payroll complexities.

4. Understand your payroll tax obligations

Payroll taxes are a critical component of running payroll for an LLC. As mentioned, failure to calculate and file these taxes correctly can result in hefty fines or penalties.

The main types of payroll taxes you need to be aware of are:

Income tax. Federal income tax is withheld from your employees’ wages based on the preferences in their W-4 form. Many states — and even some smaller local authorities — also levy additional income taxes.
Federal Insurance Contributions Act (FICA) taxes. These cover Social Security and Medicare contributions, with both you and your employees contributing. If your LLC is a single-member entity or operates as a partnership, you will need to cover both portions yourself under the guise of a self-employment tax.
Federal Unemployment Tax Act (FUTA) taxes. You will need to make FUTA contributions to provide unemployment benefits to workers who lose their jobs.
State unemployment (SUTA) taxes. These vary by state and may also require contributions from your employees. Learn more about FUTA and SUTA taxes.
Benefits. If your LLC offers additional employee benefits like health insurance, retirement contributions, or commuter benefits, you may need to account for these in payroll taxes. Remote can handle this for you.

Tax rates and requirements differ based on location, so you’ll need to check your state’s tax guidelines. To see a full breakdown by state, check out our free US State Explorer tool.

5. Test run your payroll

Once your system is in place, it’s time to run payroll! Follow these steps to ensure your employees are paid accurately and on time:

Set a payroll schedule. Decide how often your employees will be paid (weekly, bi-weekly, semi-monthly, or monthly), ensuring that the schedule aligns with state wage laws.
Collect your employees’ hours. Track hours worked using timesheets or your payroll solution. For salaried employees, this step may not be necessary. Again, ensure that you are adhering to all relevant employment laws around working hours.
Calculate deductions. Subtract federal and state taxes, Social Security, Medicare, and any benefits like health insurance or retirement contributions.
Pay your employees. Issue payments through direct deposit, paper checks, or digital payment systems. Direct deposit is often the fastest and most convenient option.
Keep records: Maintain detailed records of payroll transactions, including pay stubs, tax filings, and employee hours. These records are essential for audits or disputes.

Remote Payroll handles all of this for you, ensuring you are fully compliant at all times. For US businesses, we can even make the payments on your behalf!

To learn more about how Remote Payroll can remove all your payroll headaches, speak to one of our friendly experts today.