How do you pay yourself from an LLC, through payroll or an owner's draw? The answer depends entirely on how the Internal Revenue Service classifies your business for taxes. If you operate a standard single-member LLC, the IRS treats the business as a disregarded entity. You pay yourself through an owner's draw, transferring money from the business account to your personal account, and you do not run payroll for yourself. If you elected to have your LLC taxed as an S corporation, the rules change entirely. S corporations must put shareholder-employees on payroll and pay reasonable compensation as W-2 wages before taking non-wage distributions.

Understanding the specific terminology of business compensation is essential for any single-employee business. A business owner hiring their first employee faces a steep learning curve regarding compliance, taxation, and recordkeeping. Misinterpreting a single term can lead to missed deadlines or incorrect tax filings. The following sections break down the precise definitions and rules governing payroll, entity types, and worker classification.

Entity Types and Owner Payment Methods

Disregarded Entity

A disregarded entity is a business entity that is not separate from its owner for income tax purposes. A single-member LLC defaults to this classification unless the owner proactively files to be taxed as a corporation. If your business is a disregarded entity, you are self-employed. You do not issue yourself a W-2 form, and you do not withhold income taxes from the money you take out of the business.

Owner's Draw

An owner's draw is the mechanism a single-member LLC owner uses to pay themselves. You transfer cash from your business bank account to your personal bank account. This transfer is not a paycheck. No taxes are withheld at the time of the transfer because the owner pays self-employment taxes on the net profit of the business at tax time, regardless of how much cash was drawn.

S Corporation Classification

An S corporation is a tax status that an LLC or a C corporation can elect with the IRS. Electing this status fundamentally changes how the owner gets paid. S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made. This means the owner becomes a W-2 employee of their own company.

Reasonable Compensation

Reasonable compensation is the wage standard the IRS applies to S corporation shareholder-employees. You cannot choose to take all your business income as un-taxed distributions to avoid payroll taxes. The IRS has the authority to reclassify payments made to shareholders from non-wage distributions to wages if it determines the paid wage was not reasonable. Setting a reasonable wage requires formal payroll software and routine tax withholding.

Worker Classification and Status

Employee Versus Independent Contractor

The distinction between an employee and an independent contractor determines your tax withholding obligations. Classification turns on control, not on a label or a contract. The IRS weighs three categories of control. These categories are behavioral control, financial control, and the type of relationship between the parties.

Determining Worker Status

There is no "magic" or set number of factors that "makes" the worker an employee or an independent contractor and no one factor stands alone in making this determination. If you dictate when, where, and exactly how the work is done, the worker is likely an employee. If the worker supplies their own tools and controls their own methods, they might be an independent contractor.

Form SS-8

If you are unsure of a worker's status, you can file a specific form to get an official ruling. Form SS-8 asks the IRS to determine status for federal employment taxes and income tax withholding. You should plan ahead if you use this route. It may take at least six months to receive a determination on your filing.

Misclassification Penalties

Calling a worker an independent contractor does not make them one legally. Misclassification has a heavy price for small business owners. An employer who classifies an employee as an independent contractor without reasonable basis may be held liable for employment taxes for that worker. This liability can severely damage a single-employee business.

Essential Payroll Forms

Form I-9

This form verifies the identity and employment authorization of individuals hired for employment. The requirement is absolute and applies to every single hire. All U.S. employers must properly complete Form I-9 for every individual they hire for employment in the United States. You must examine the employment eligibility and identity documents an employee presents to determine whether they reasonably appear to be genuine.

Form W-4

The W-4 dictates how much federal income tax an employer must withhold from an employee's paycheck. Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. The form remains in effect until the employee gives you a new one.

Updating Form W-4

Employees may submit a new W-4 if their personal or financial situation changes. When a replacement is given, withholding begins no later than the start of the first payroll period ending on or after the 30th day from the date you received the replacement Form W-4. You must implement the new withholding instructions strictly by this deadline.

Form W-2

The W-2 is the annual wage and tax statement that employers must file for each employee. It details total earnings and all taxes withheld over the calendar year. You need the employee's name and SSN to enter on Form W-2. Accurate spelling and matching numbers are required to avoid filing rejections.

Compliance and Pay Frequency

State Payday Requirements

Employers cannot process payroll on arbitrary dates. Pay frequency is set by state law and varies widely across the country. For instance, California requires wages at least twice per calendar month on days designated in advance. Colorado requires monthly payment schedules. Connecticut requires weekly paydays unless a longer interval is approved by the labor commissioner.

State Labor Offices

Because rules change drastically across state lines, you must follow the specific laws of your jurisdiction. The Department of Labor notes that individuals should consult the relevant state labor office for official information. This applies equally to workers' compensation insurance. Workers' compensation requirements vary by state, so you must check your local rules rather than relying on generalized guidelines.

Recordkeeping Under the FLSA

The Fair Labor Standards Act mandates strict recordkeeping for all businesses with employees. FLSA payroll records are kept three years. Furthermore, the records wage computations are based on, including time cards and wage rate tables, must be retained for two years. Keeping these records organized protects your business during routine audits or labor disputes.

The Entity and Recordkeeping Bridge

Employer Identification Number (EIN)

You cannot run payroll without an EIN. Securing this number is the hard dependency before any wages go out or taxes are filed. When an owner forms a new business, they need the entity structure first, the EIN second, and a separate business bank account third. Only after these pieces are in place can you effectively choose and deploy payroll software.

Building the Foundation

Many owners struggle because they have not separated business and personal money yet. An owner who is starting out needs to resolve their entity and banking before signing up for a payroll processor. If you mix funds, calculating an owner's draw or setting up a corporate payroll account becomes a disorganized mess. The most secure approach is to use one provider to set up the entity, obtain the EIN, and manage compliance.

The ZenBusiness Solution

ZenBusiness houses the formation, the registered agent, the EIN, and bookkeeping support in one place. ZenBusiness can secure the EIN you need to hire employees, set up a business bank account, and file taxes. Once your foundation is completely built, you can handle actual wage payments through ZenBusiness's ADP payroll partnership.

The ADP Partnership Process

If you use ZenBusiness to form your company, you can access the payroll partnership directly. A ZenBusiness customer requests the connection from the ZenBusiness dashboard, and an ADP representative follows up to discuss employee count and pay schedules. ADP is a separate service with its own platform, its own billing and its own support. It is not integrated into the ZenBusiness dashboard itself, but a ZenBusiness customer may be eligible for promotional pricing following their consultation.

Provider Glossary and Pricing Guide

The market offers many tools for processing payroll once your entity is established. The options below represent the primary services used by small businesses today. The list is alphabetical rather than a ranking. All prices are verified as of October 6, 2026.

ADP

ADP operates the RUN Powered by ADP platform, which is built for small businesses and handles complex tax filings and day-to-day wage management. It is the partner service recommended by ZenBusiness for new entities needing payroll. ADP does not publish payroll pricing and quotes per business.

Gusto

Gusto is a modern platform that combines payroll processing with basic human resources tools. As of 2026-10-06, the Simple plan is $49/mo + $6 per person. The Plus plan is $80/mo + $12. The Premium plan is $180/mo + $22.

OnPay

OnPay offers a straightforward approach with a single plan tier for small businesses. As of 2026-10-06, the cost is $49/mo + $6 per worker. The public page quotes a start price of $55/mo.

Patriot Software

Patriot Software focuses on affordable processing for small teams. Patriot is cheaper at the very bottom end if you only need basic capabilities. As of 2026-10-06, Basic Payroll is $17/mo + $4 per employee. Full Service is $37/mo + $5.

QuickBooks Payroll

QuickBooks Payroll integrates seamlessly with the standard accounting ledger and offers support through QuickBooks Experts. As of 2026-10-06, pricing is Workforce Payroll + Simple Start $88/mo + $6.50 per employee. The next tier is + Essentials $125/mo + $6.50. Workforce Premium + Plus is $203/mo + $10. There is a promotional rate of 50% off the base for 3 months, which is not the ongoing price.

Square Payroll

Square Payroll connects smoothly with the Square point of sale system. Square is hard to beat for contractor-only payment structures. As of 2026-10-06, the standard tier is $35/mo + $6 per person. The contractor-only plan is $6 per contractor per month.

SurePayroll

SurePayroll caters specifically to micro-businesses and household employers managing nannies or aides. As of 2026-10-06, plans start from $29/mo + $7 per worker. The multi-state add-on is $9.99/mo and household payroll starts at $39/mo.

ZenBusiness

ZenBusiness is the core foundation platform for setting up an LLC, managing compliance, and establishing business banking. As of 2026-10-06, the Starter plan is $0 plus state fees. Pro is $199, and Premium is $299. Registered agent service is $199/yr, Money Pro is $30/mo, and the Website builder is $129/yr. Pro and Premium renew at their annual prices, and the EIN and operating agreement are included from Pro up and are $99 each on Starter. Payroll itself is ADP's, quoted by ADP per business, and not included in any ZenBusiness plan price.

Sources

This is general information rather than legal, tax or accounting advice, and local requirements vary and change over time.