When to Switch From Paying Yourself to Running Payroll
Updated 2026-10-27
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This article is general information, not legal or tax advice. Talk to a licensed professional about your situation.
Early on, most owners pay themselves by moving money to their personal account when they can. At some point you need real payroll: withholding, tax deposits and quarterly filings. Here's how to tell when.
The short answer: your structure decides
How you can pay yourself depends on how the business is taxed, not on how much it makes.
| How the business is taxed | How the owner usually gets paid |
|---|---|
| Sole proprietor or single-member LLC (default) | Owner's draw; no paycheck to yourself |
| Multi-member LLC taxed as a partnership | Draws, distributions or guaranteed payments, not W-2 wages |
| S corporation (including an LLC that elected S status) | Reasonable salary through payroll, then distributions |
| C corporation | Salary through payroll for officers who work in the business |
If you're a sole proprietor or single-member LLC
You generally don't put yourself on payroll. You take an owner's draw, a transfer of profit to yourself with no tax withheld.
You still owe tax on the profit, though. The IRS says self-employment tax runs 15.3% (12.4% for Social Security and 2.9% for Medicare) and applies if your net earnings from self-employment are $400 or more. Most owners in this group make quarterly estimated tax payments with Form 1040-ES.
Partners are in a similar spot: the IRS says partners aren't employees and shouldn't get a W-2. They receive a Schedule K-1 instead.
If you're an S corporation: the "reasonable compensation" rule
This is the most common reason owners switch. The IRS says an S corporation must pay reasonable compensation to a shareholder who works in the business before making non-wage distributions. Skip the salary and the IRS can reclassify distributions as wages subject to employment taxes.
There's no fixed formula. The IRS lists factors such as:
- Your training and experience
- Your duties and responsibilities
- The time and effort you put in
- What comparable businesses pay for similar services
- What the business pays non-owner employees
If you've elected S status, or plan to, payroll isn't optional. Set a defensible salary with a tax professional first.
The other trigger: hiring your first employee
The day you hire someone, you're running payroll whatever your structure. The IRS says employers generally must:
- Withhold federal income tax based on the employee's Form W-4
- Withhold the employee's share of Social Security and Medicare and pay the employer's share
- Pay federal unemployment (FUTA) tax from your own funds
- Deposit taxes electronically, for example through EFTPS
- File Form W-2 for each employee
The IRS also says you can't make someone a contractor just by issuing a Form 1099-NEC instead of a W-2.
Key federal forms and deadlines
| Form | What it covers | When it's due |
|---|---|---|
| Form 941 | Withheld income tax plus Social Security and Medicare | Generally the last day of the month after each quarter (April 30, July 31, October 31, January 31) |
| Form 944 | An annual version for very small employers ($1,000 or less in yearly employment tax) | Only if the IRS notifies you to file it; generally due January 31, or February 10 if all taxes were deposited on time |
| Form 940 | Annual FUTA tax | January 31, or February 10 if all FUTA tax was deposited on time |
FUTA is 6.0% on the first $7,000 of each employee's wages; employers who pay state unemployment tax on time can usually get a credit of up to 5.4%.
Florida-specific payroll steps
Reemployment tax (Florida's unemployment tax). According to the Florida Department of Revenue:
- You become liable if you pay $1,500 or more in wages in a calendar quarter, or have at least one employee during any 20 weeks of a calendar year (other rules apply to nonprofits, farms and household employers).
- New employers start at a 2.7% rate on the first $7,000 of each employee's wages per year.
- Register with the Florida Business Tax Application (Form DR-1) by the end of the month after the quarter in which you became an employer.
- File the Employer's Quarterly Report (Form RT-6) by April 30, July 31, October 31 and January 31.
New hire reporting. Report new and rehired employees to Florida's New Hire Reporting Center within 20 days of their start date. Independent contractors paid $600 or more in a calendar year must be reported too, within 20 days of their start date or first payment.
Workers' compensation. Check whether your business must carry coverage with Florida's Division of Workers' Compensation before your first hire.
Doing it yourself vs. using payroll software
You can run payroll by hand with IRS Publication 15 and the state's forms, but deposit schedules and quarterly filings are easy to miss. Payroll software or a payroll service can handle withholding, deposits and filings. Compare price per employee, whether state filings and new hire reports are included, and year-end form support.
Quick checklist before your first payroll
- [ ] Confirm your tax classification (sole prop, partnership, S corp or C corp)
- [ ] If you're an S corp, set a reasonable salary with your tax professional
- [ ] Collect Form W-4 and Form I-9 from each employee
- [ ] Register for Florida reemployment tax when you become liable
- [ ] Report new hires within 20 days
- [ ] Put the 941, RT-6 and 940 dates on your calendar
FAQ
Can I put myself on payroll as a single-member LLC? Not under default tax treatment; you take draws. To pay yourself wages, the LLC would need to elect corporate or S corporation treatment.
Is there a profit level where I should switch to an S corp and payroll? The IRS doesn't set one. It depends on your profit, a reasonable salary for your role, and the added payroll costs. A tax professional can run the numbers.
Do I have to pay Florida reemployment tax on my own draws? Florida's Department of Revenue says services performed by a sole proprietor or partner aren't covered employment. Wages paid to corporate officers, including S corporation owners who work in the business, are treated as wages.
Sources
- IRS: Paying yourself
- IRS: S corporation compensation and medical insurance issues
- IRS: Understanding employment taxes
- IRS: Topic 758, Form 941 and Form 944
- IRS: Topic 759, Form 940
- IRS: Self-employment tax
- Florida Department of Revenue: Florida Reemployment Tax
- Florida Department of Revenue: New hire reporting and Reemployment tax additional topics
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