Yes, an LLC can have employees. Every LLC, whether it has one member or many, has the legal authority to hire W-2 workers and take on the full set of employer obligations that come with them. The practical work sits in the setup: getting an Employer Identification Number, handling new-hire paperwork correctly, lining up workers’ compensation coverage, and running payroll withholding and deposits on the schedule the IRS expects.
One wrinkle is specific to LLCs and catches owners off guard, so it belongs at the top before anything else.
LLC Members Usually Aren’t Employees of Their Own LLC
If your LLC is taxed as a partnership (the default for multi-member LLCs) or as a disregarded entity (the default for single-member LLCs), the members who work in the business are self-employed for federal tax purposes. They can’t go on the company’s W-2 payroll. The IRS has held this position since 1969: a partner in a partnership, including a member of an LLC taxed as a partnership, is not an employee of that entity.1Internal Revenue Service. Topic No. 554, Self-Employment Tax
Working members take guaranteed payments or profit distributions reported on Schedule K-1 instead of a paycheck, and they pay self-employment tax at 15.3% covering both the Social Security and Medicare portions.2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) A single-member LLC owner reports business income and expenses on Schedule C of their personal return.3Internal Revenue Service. Single Member Limited Liability Companies
The exception is an LLC that has elected S-corporation taxation. Under that structure, any member performing more than minor services must receive reasonable W-2 compensation before taking additional distributions, and the IRS can reclassify distributions as wages if it decides the salary was unreasonably low.4Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers
None of this limits the LLC’s ability to hire non-member employees. Whatever tax treatment the LLC uses, it can bring on W-2 workers, and those workers are employees of the LLC itself.
Decide Whether the Worker Is an Employee or a Contractor
Before you hire, settle the classification. The IRS looks at three categories of evidence: behavioral control (do you direct how the work gets done, or just the end result?), financial control (do you supply tools, reimburse expenses, and control how the person is paid?), and the nature of the relationship (written contract, benefits, whether the work is a core part of the business).5Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? No single factor controls; the IRS weighs the whole picture.
Getting this wrong is expensive. If you treat someone as a contractor who should have been an employee, the IRS can hold you liable for back employment taxes under a reduced-rate formula: 1.5% of the worker’s wages for the income tax you should have withheld, plus 20% of the employee’s share of Social Security and Medicare, on top of your full employer FICA share. If you also failed to file the required 1099 forms, those rates double to 3% and 40%.6Office of the Law Revision Counsel. 26 USC 3509 – Determination of Employers Liability for Certain Employment Taxes If the IRS finds the misclassification intentional, the reduced rates don’t apply at all. The Department of Labor can also pursue unpaid overtime and minimum wage claims going back several years.
What to Set Up Before Day One
Employer Identification Number
If your LLC doesn’t already have an EIN, apply for one free on the IRS website; the number is issued immediately.7Internal Revenue Service. Employer Identification Number It goes on every payroll tax filing, every W-2, and every federal tax communication. A single-member LLC that previously operated under the owner’s Social Security number needs an EIN once it has employees.
Form W-4 and Form I-9
Every new hire fills out Form W-4 so you can calculate the right federal income tax withholding.8Internal Revenue Service. About Form W-4, Employees Withholding Certificate You also have to verify identity and work authorization on Form I-9. The employee chooses which documents to present: one List A document (such as a U.S. passport, which covers both identity and work authorization) or a combination of one List B document (a driver’s license, for identity) and one List C document (an unrestricted Social Security card, for work authorization). You must examine the originals within three business days of the first day of work.9USCIS. 4.0 Completing Section 2 – Employer Review and Verification You cannot tell the employee which specific documents to bring.
State New-Hire Reporting
Federal law requires you to report each new hire to your state’s Directory of New Hires within 20 days of the start date; some states set shorter deadlines.10Administration for Children & Families. New Hire Reporting The information feeds a national database used for child support enforcement and unemployment fraud detection.
Workers’ Compensation Insurance
Nearly every state requires workers’ compensation coverage once you have at least one employee, though the exact trigger varies. The policy pays medical costs and lost wages when an employee is injured on the job. Premiums are usually calculated as a rate per $100 of payroll and depend heavily on industry risk; an office-based LLC pays far less than one doing construction. Coverage needs to be in place by the employee’s first day.
Payroll Taxes You’ll Owe and Withhold
FICA
Social Security tax is 6.2% and Medicare tax is 1.45% on both the employer and employee sides, so you withhold 7.65% from each paycheck and pay a matching 7.65% out of pocket.11Social Security Administration. Social Security and Medicare Tax Rates Social Security tax applies only up to the annual wage base, which is $184,500 for 2026.12Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security Medicare has no cap, and once an employee’s wages pass $200,000 you also withhold an additional 0.9% Medicare tax from them (you don’t match that extra portion).
Federal and State Income Tax Withholding
You withhold federal income tax from each paycheck using the information on the employee’s W-4: filing status, dependents, and any additional withholding they request. Most states require state income tax withholding on top of that.
Federal Unemployment Tax
FUTA is a 6.0% tax on the first $7,000 of wages paid to each employee each year. If you pay state unemployment tax on time, you receive a credit of up to 5.4%, which drops the effective FUTA rate to 0.6%, or about $42 per employee per year.13Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return FUTA is paid entirely by the employer; nothing is withheld from the worker. State unemployment rates and wage bases vary widely, with taxable wages ranging from $7,000 to over $78,000 per employee depending on the state.
Deposit Schedule
Federal deposits of income tax withholding plus both halves of FICA have to go through the Electronic Federal Tax Payment System or another approved electronic method.14Internal Revenue Service. Depositing and Reporting Employment Taxes Whether you deposit monthly or semi-weekly is determined by your reported employment tax liability during a lookback period. $50,000 or less puts you on a monthly schedule, with each month’s taxes due by the 15th of the following month. More than $50,000 puts you on a semi-weekly schedule tied to pay dates.15Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide Most new LLCs start out monthly.
Quarterly and Annual Filings
Each quarter, file Form 941 reporting total wages, federal income tax withheld, and both shares of Social Security and Medicare tax. The deadlines are April 30, July 31, October 31, and January 31.16Internal Revenue Service. Instructions for Form 941 (03/2026) Very small employers with annual employment tax liability of $1,000 or less may qualify to file Form 944 once a year instead.
Once a year, file Form 940 to report and pay FUTA. The return is generally due January 31, with an extra ten days if you deposited all FUTA on time during the year.17Internal Revenue Service. Instructions for Form 940 (2025) If accumulated FUTA liability goes over $500 in a quarter, deposit it by the end of the following month instead of waiting for the annual return.
By February 1, 2027, you must give each 2026 employee a W-2 and file copies with the Social Security Administration using Form W-3.18Internal Revenue Service. General Instructions for Forms W-2 and W-3 The IRS cross-checks the four quarterly 941s against the W-3 totals, so the numbers have to match.
Miss a deadline and the failure-to-file penalty is 5% of the unpaid tax per month (or partial month) up to 25%, with interest on top.19Internal Revenue Service. Failure to File Penalty For a small LLC, that can compound quickly.
Workplace Rules That Apply as You Hire
The Fair Labor Standards Act applies to LLCs the same way it applies to any other business. You must pay at least the federal minimum wage and pay overtime at 1.5 times the regular rate for hours over 40 in a workweek.20Office of the Law Revision Counsel. 29 USC Ch. 8 – Fair Labor Standards Certain salaried executive, administrative, or professional employees are exempt from overtime, but only if they earn at least $684 per week ($35,568 annually) and meet the duties tests. A 2024 attempt by the Department of Labor to raise this threshold was vacated in federal court, so the 2019 figure remains current.21U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption A salaried worker paid below that is entitled to overtime regardless of job title.
Every employer covered by the Occupational Safety and Health Act has to maintain a safe workplace and report any work-related fatality, hospitalization, amputation, or eye loss to OSHA. If you had more than 10 employees at any point during the previous calendar year, you also keep detailed injury and illness records. Businesses with 10 or fewer are partially exempt from that recordkeeping, though not from the reporting or safety duties.22Occupational Safety and Health Administration. Partial Exemption for Employers With 10 or Fewer Employees
Federal anti-discrimination coverage phases in by headcount. Title VII and the Americans with Disabilities Act apply at 15 or more employees for at least 20 calendar weeks in the current or preceding year. The Age Discrimination in Employment Act applies at 20 employees. The Equal Pay Act applies to virtually all employers regardless of size.23U.S. Equal Employment Opportunity Commission. Coverage of Business/Private Employers State anti-discrimination laws often reach smaller employers.
You also have to display certain federal notices where employees can see them. The Department of Labor offers a poster package covering the FLSA, FMLA, OSHA, and equal employment opportunity requirements, among others.24U.S. Department of Labor. Workplace Posters Which posters apply depends on your size and the laws that cover you, and most states add their own.
Records to Keep
Keep all employment tax records (W-4s, deposit receipts, 941 filings, payroll registers) for at least four years after filing the fourth-quarter return for the year.25Internal Revenue Service. Employment Tax Recordkeeping Form I-9 is on a different schedule: three years after the hire date or one year after the employee stops working for you, whichever is later.26U.S. Citizenship and Immigration Services (USCIS). 10.0 Retaining Form I-9 For someone who works for you less than two years, that means three years from the start date; longer than two years, one year after they leave. A dedicated personnel file for each employee with tax forms, I-9, and benefit records in it makes an audit far less painful.