Payroll Software by Business Entity Type
Your business structure determines whether you need payroll at all, and what kind. S-corp owners must run payroll even if they're the only worker. Sole proprietors taking draws do not. Get the wrong answer and you either over-pay or face IRS penalties.
Quick reference:
- Sole proprietor: No payroll for yourself. Payroll only if you hire W-2 employees.
- Single-member LLC (default taxation): Same as sole prop. Owner draws, not W-2.
- S-corp or LLC taxed as S-corp: Must pay yourself a W-2 salary. Payroll required.
- C-corp: Owner-workers must take W-2 wages. Payroll required.
- Partnership: Partners take guaranteed payments, not W-2. Non-partner employees need payroll.
Sole Proprietorship
Payroll required: Only if you hire W-2 employees
Sole proprietors do not take a paycheck. You report all business income and expenses on Schedule C of your personal tax return and pay self-employment tax on the net profit. If you hire W-2 employees (not contractors), you need payroll software to manage their withholding and filings. If you only work with independent contractors, you need 1099 filing tools but not full payroll software.
Best payroll software if hiring W-2 employees:
Patriot Full-Service ($37 + $5) for cost-sensitive single-state. Gusto Simple ($49 + $6) as the default recommendation.
Single-Member LLC (Default Taxation)
Payroll required: Only if you hire W-2 employees
A single-member LLC taxed as a disregarded entity (the default) is treated identically to a sole proprietorship for federal tax purposes. The LLC provides liability protection but does not change how you pay yourself. Owner draws are not W-2 wages. If you elect S-corp taxation for your LLC, the rules change significantly (see S-corp section below).
S-Corporation (Including LLCs Taxed as S-Corps)
Payroll required: Yes - even if you are the only worker
This is the highest-stakes entity type for payroll. S-corp taxation is popular because it allows you to split income into salary (subject to payroll tax) and distributions (not subject to payroll tax). But the IRS requires that you pay yourself a "reasonable compensation" W-2 salary for the work you perform in the business before taking distributions.
Failing to pay reasonable compensation - or paying an unreasonably low salary - is one of the top IRS audit triggers for S-corps. The IRS can reclassify distributions as wages and assess back payroll taxes plus penalties.
What "reasonable compensation" means
Reasonable compensation is what a similar business would pay a comparable employee to do the same work. There is no IRS-defined minimum or formula, but the IRS looks at: comparable wages for your industry and role, time you spend in the business, the profitability of the business, whether your compensation has been documented. A common approach: pay yourself the market salary for your role, document the decision, and ensure distributions are consistently above zero.
Best payroll software for S-corp owners
Gusto Simple
$49 + $6/emp
Best. Has specific S-corp onboarding, guided reasonable compensation setup, full W-2 and quarterly filing.
QuickBooks Core
$50 + $6/emp
Excellent if you use QuickBooks. Native QBO sync is valuable for owner-operator accounting.
Patriot Full-Service
$37 + $5/emp
Works but no S-corp guidance. You need to know what you're doing to use Patriot for owner-only S-corp payroll.
IRS penalty risk: An IRS audit finding that your S-corp salary was unreasonably low can result in back payroll taxes plus a 100% accuracy-related penalty on the underpayment. For many S-corp owners the payroll software cost is trivial compared to this risk.
C-Corporation
Payroll required: Yes - for any owner who works in the business
C-corp shareholders who work in the business must be paid W-2 wages for their services. This is straightforward: you set up payroll, pay yourself a market-rate salary, and take dividends separately. All major payroll providers handle standard C-corp payroll without any special features required.
Best options: Gusto Simple, OnPay, or QuickBooks Core - whichever best matches your accounting setup and team size.
Partnership and Multi-Member LLC
Payroll required: Only for non-partner W-2 employees
Partners (including members of a multi-member LLC taxed as a partnership) cannot be W-2 employees of the same partnership for federal tax purposes. Partners take guaranteed payments (fixed amounts regardless of profit), which are reported on Schedule K-1 and subject to self-employment tax, not withholding. If the partnership has W-2 employees (non-partners), it needs payroll software for those employees.
See also: payroll for 1-5 employees | contractor payroll | paired accounting: bestaccountingsoftwareforsmallbusiness.com