Most people assume payroll is payroll. You earn money, you pay yourself, and taxes happen somewhere in the process. Simple enough.
Except when you own the business, it stops being that simple. How you pay yourself depends entirely on how your business is set up legally. And the difference between an LLC payroll and an S-Corp payroll isn’t just paperwork. It changes your tax bill, your admin workload, and frankly, how much of your own money you actually get to keep.
The LLC Way of Paying Yourself
Suppose you’ve set up your LLC, clients are paying you, and money is sitting in the business account. How do you actually get paid? You just… move it. Transfer it to your personal account whenever you need it. This is called an owner’s draw, and it’s about as straightforward as it sounds.
There is no salary and no payroll software. No tax withheld at the point of payment. You take what you need, and then, this is the part people sometimes forget, you deal with the tax separately. Usually, every quarter, you send the government an estimated payment based on what you’ve earned. It’s called quarterly estimated tax, and missing it comes with penalties, so worth setting a reminder.
For a new or small business, this setup is genuinely great. It is low admin, flexible, and has no formalities. The downside only really shows up when you start earning decent money. After all, every penny of profit gets hit with self-employment tax, which sits at 15.3% and covers your Social Security and Medicare contributions. There’s no way around it in a standard LLC Payroll.
What Changes With an S-Corp
Right, so here’s where it gets interesting.
An S-Corp, or an LLC that’s elected to be taxed as an S-Corp, treats you differently. By the way, it is a thing you can do. So, instead of just being the owner, you’re also officially an employee of your own business. Which sounds odd, but bear with me. Because you’re an employee, you have to pay yourself an actual salary. That means real payroll. It could be regular payments, taxes withheld, the works. More on the admin side of that in a moment.
But the bit that makes people sit up: once you’ve paid yourself that salary, any additional profit from the business can be taken as a distribution. A distribution is just your share of the profits as an owner, and crucially, it isn’t subject to self-employment tax the way your salary is.
So instead of 15.3% self-employment tax on everything, you’re only paying it on your salary portion. The distribution portion gets taxed differently, and generally at a lower rate.
The “Reasonable Salary” Bit You Can’t Ignore
Before anyone gets excited about setting their salary at £1 to maximize distributions, the IRS has thought of that.
You’re required to pay yourself what they call a “reasonable salary.” That means roughly what you’d have to pay an outside hire to do your job. The IRS looks at industry standards, your qualifications, and what comparable roles pay. There’s no fixed number, but deliberately lowballing your salary is one of the more reliable ways to get audited.
The good news is that reasonable doesn’t mean maximum. It just means defensible. Most business owners work this out with their accountant when they make the switch.
The Admin Reality of S-Corp Payroll
The honest part is that S-Corp payroll is more work. Not impossible, but not nothing either.
Every pay period, payroll taxes get withheld from your salary and need to be deposited with the IRS on a set schedule. Miss a deposit, and you’re looking at penalties starting almost immediately. Every quarter, there’s a filing called Form 941 that reports what you paid and what you withheld. At year’s end, you issue yourself a W-2 like any other employee. And if your state has its own payroll requirements, those run alongside all of the above.
This is why most S-Corp owners don’t handle payroll themselves. The risk of something going wrong is high. It could be a wrong amount, wrong date, or wrong form, and it is just high enough that paying someone else to manage it is usually the smarter call. S-Corp payroll services exist specifically for this, and for most business owners, the cost is more than offset by not having a compliance problem land on their desk.
The Simple Version, Side by Side
LLC: Take an owner’s draw whenever you need it. All profits are taxed as self-employment. Simple, flexible, low admin. Great for earlier stages.
S-Corp: Pay yourself a salary through payroll. Salary gets payroll taxed. Extra profit comes out as distributions at a lower tax rate. More admin involved, but the tax saving justifies it once profits are strong enough.
One Last Thing
The LLC vs S-Corp choice isn’t a one-time decision either. Plenty of businesses start as LLCs and make the switch later when the timing makes sense. You’re not locked in, and changing structures is entirely normal. While yes, it involves some paperwork too.
What matters most is not leaving it on autopilot. A lot of business owners stick with their original setup long past the point where it stopped being the best option, simply because nobody flagged that the calculation had changed. It’s worth revisiting once a year with whoever handles your accounts, even just a quick “does this still make sense?” conversation.
Because with payroll and tax structure, the cost of inertia tends to be higher than most people realize until they look back and do the maths.
