Does a two-person LLC need to set up payroll for owners?

You don't necessarily need to run payroll for a two-person LLC, but it depends on how you elect to be taxed. By default, a multi-member LLC is taxed as a partnership. In this case, you don't take a "salary" through payroll. Instead, you take "draws" from the business. You'll each receive a Schedule K-1 showing your share of the profits (or losses), and you'll pay self-employment taxes on that income regardless of how much you actually withdraw from the business. If you elect to be taxed as an S-Corporation, that's different. Then you would need to run payroll and pay yourselves a "reasonable salary" and withhold taxes. Any additional money you take beyond that salary could be classified as distributions, which aren't subject to self-employment taxes.

I went through the same headache last year with my business partner. After trying to figure it all out myself, I finally used https://taxr.ai to analyze our situation. It saved me so much confusion! I uploaded our LLC docs and they explained exactly how we should handle our payments as LLC owners. What I learned was that with our standard LLC structure (filed as partnership), we didn't need formal payroll. We just needed to track our owner's draws carefully for our Schedule K-1s and make quarterly estimated tax payments.

Just wanted to update after trying the taxr.ai service mentioned above. It actually gave me exactly what I needed! I uploaded our draft LLC operating agreement and it immediately flagged that we hadn't specified our tax treatment preference. It then explained the pros/cons of partnership vs. S-Corp taxation given our expected revenue. The breakdown of owner's draws vs. payroll requirements was super clear. Even showed us how to properly document owner's draws to avoid issues during tax season. Totally worth checking out if you're setting up a new LLC.

Similar situation last year - partnership LLC with my cousin. We spent WEEKS trying to get through to the IRS to ask specific questions about our situation, but kept hitting automated systems. Then I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c and it was a lifesaver. They got me connected to an actual IRS agent in like 20 minutes when I'd been trying for days. The agent confirmed we didn't need to run payroll as a partnership LLC and explained exactly how the Schedule K-1 process works. Saved us from making a costly mistake with our tax structure.

I have to issue a formal apology and correction to my skeptical comment. After my frustration boiled over with trying to contact the IRS about my LLC tax questions, I broke down and tried Claimyr. Holy. Crap. It actually worked. I was connected to an IRS representative in about 35 minutes (without me having to actually sit on hold). The agent confirmed that our two-person LLC didn't need formal payroll as long as we maintained partnership tax status. They explained how to properly document owner's draws and maintain clean books for tax time. I've spent MONTHS trying to get this information. Should have just used this service from the beginning!

One more thing to consider about your LLC: if you're operating in a state with an annual LLC fee or franchise tax, make sure you're setting aside money for that too. California for example has a minimum $800 annual tax for LLCs regardless of whether you make a profit. Also, you might want to consider using an accounting system from the beginning to track everything properly. We use QuickBooks Online for our LLC and it makes it way easier to track draws vs business expenses.

Don't forget about business licenses and permits! When my friend and I started our LLC, we were so focused on the tax stuff that we forgot to get proper local business licenses. Ended up with a fine!

Great question! I went through this exact same confusion when I started my LLC with a business partner. The key thing to understand is that LLCs are very flexible in how you can pay yourselves. As others mentioned, with the default partnership taxation, you don't need payroll - you can just take owner's draws whenever you need money. Just make sure to keep good records of what you take out, because you'll each pay taxes on your 50% share of the business profits regardless of how much you actually withdraw. One tip that saved me a lot of headache: open a separate business checking account immediately and keep personal and business expenses completely separate. This makes tracking your draws much easier and keeps everything clean for tax time. Also, definitely consult with a CPA early on to make sure you're handling the quarterly estimated payments correctly. The self-employment tax can be a surprise if you're not prepared for it!

This is such a common confusion point for new LLC owners! I went through the exact same thing when my business partner and I started our consulting LLC two years ago. The short answer is: with a standard two-member LLC (taxed as a partnership), you don't need formal payroll. You can take owner's draws as needed throughout the year. Just remember that you'll both be taxed on your 50% share of the business profits regardless of how much you actually take out. A few practical tips that would have saved me stress: - Set up a business bank account immediately and keep it completely separate from personal accounts - Track every draw you take (even a simple spreadsheet works) - Set aside about 25-30% of profits for taxes (self-employment tax is 15.3% plus regular income tax) - Consider getting an EIN from the IRS even if not required - it makes banking easier You'll each get a Schedule K-1 at tax time showing your share of profits/losses. The business itself doesn't pay income taxes, but you'll need to make quarterly estimated payments since no taxes are being withheld. Don't stress too much about getting everything perfect right away - you can always adjust as you learn! The important thing is to keep good records from day one.