Payroll for a Foreign-Owned US LLC: Forms 941, 940, W-2 — and the ECI Consequence

Check-the-box starts from the familiar default: a single-member LLC that has not elected corporate status is disregarded, and its activities are treated as a sole proprietorship, branch, or division of the owner. Treas. Reg. section 301.7701-2(c)(2)(iv) then carves out Subtitle C — employment taxes and wage withholding — and treats the disregarded entity as a corporation for those taxes. The result is that the LLC itself, not the foreign owner, is the employer for payroll purposes. The regulation illustrates this with a disregarded LLC paying wages under sections 3121(a), 3306(b), and 3401(a): for Subtitle C, it is separate from its owner.

Practically, that means the LLC uses its own EIN on Forms 941 or 944, Form 940, and the W-2/W-3 set. With an EIN already issued, there is no separate federal payroll registration the way most states require one — the federal setup is operational: determine the filer type, withhold, deposit electronically, and file on calendar.

Two carve-outs keep tripping people. First, the Subtitle C rule does not cover section 3406 backup withholding — for backup withholding the regulation expressly leaves the owner as the responsible party, and the Form 941 instructions say backup and other nonpayroll withholding belong on Form 945, never on 941. Second, the disregarded LLC is not treated as the employer of its own owner: the owner does not go on the payroll or issue a W-2 to themselves merely because the LLC runs payroll for staff. The owner-side income stays in the income-tax lane, not the wage lane.

An LLC paying wages subject to federal income tax withholding or Social Security and Medicare taxes generally files Form 941 every quarter, starting with the quarter in which wages are first paid and continuing each quarter unless a specific exception applies. The returns are due the last day of the month after quarter-end — April 30, July 31, October 31, and January 31 — with the usual shift to the next business day for weekends and legal holidays.

Form 944 is the annual alternative for the smallest employers — those whose combined annual liability for withheld income tax plus Social Security and Medicare is $1,000 or less. But 944 status is not elective: an employer files Form 944 only if the IRS has notified or approved that status. The 944 instructions are blunt — if the IRS did not tell you to file 944, do not file it.

Timing matters here. To switch to Form 944 for calendar year 2026, an employer had to contact the IRS by April 1, 2026 (or mail a written request postmarked by March 16, 2026). That window is closed, so an LLC making its first hire mid-2026 without a 944 notice is a Form 941 filer for 2026, with a status change possible in a later year only if the IRS approves it.

Note that 944 changes the return frequency, not necessarily the deposit frequency. A 944 filer with annual tax of $2,500 or more is generally back under the deposit rules, and a quarter with $2,500 or more pushes it into the monthly or semiweekly schedules — covered below.

Federal income tax withholding runs on statute: section 3402 requires every employer paying wages to deduct and withhold using the Treasury tables or computational procedures, and section 3403 makes the employer itself liable for the amounts required to be withheld. The inputs are the employee's Form W-4 and Publication 15-T, which carries the actual withholding computations.

For FICA in 2026: Social Security is 6.2% each for employer and employee on wages up to a $184,500 wage base; Medicare is 1.45% each with no wage cap. Once an employee's calendar-year wages pass $200,000, the employer must withhold an extra 0.9% Additional Medicare Tax from the employee — there is no employer match on that 0.9%. These mirror the section 3101/3111 employee and employer taxes, with section 3102 requiring the employer to collect the employee share from wages.

FUTA is employer-only: a gross 6.0% on the first $7,000 of wages per employee, which drops to an effective 0.6% when the full 5.4% state unemployment credit is available. FUTA deposits are required once cumulative quarterly liability exceeds $500, due the last day of the month after the quarter; a fourth-quarter balance of $500 or less can simply ride along with Form 940. The annual Form 940 itself is required once the LLC paid $1,500 or more in wages in any calendar quarter, or had at least one employee for part of a day in 20 or more different weeks in the current or prior year — due January 31, with roughly ten extra days to file if every FUTA deposit was made on time.

All federal tax deposits must be made by electronic funds transfer — in practice EFTPS, with the IRS business tax account and Direct Pay for businesses as alternate electronic routes. The deposit schedule is set by the lookback period, not by how often payroll runs.

A new Form 941 employer has zero liability for the lookback quarters before the business existed, so it is a monthly depositor for its first calendar year: taxes on wages paid during a month are due by the 15th of the following month. Employers with more than $50,000 of lookback-period liability are semiweekly depositors: taxes on wages paid Wednesday through Friday are due the following Wednesday, and taxes on wages paid Saturday through Tuesday are due the following Friday.

The escalation rule overrides both schedules. Accumulate $100,000 or more of employment taxes on any day in a deposit period and the deposit is due the next business day — and a monthly depositor that trips the rule becomes a semiweekly depositor the very next day, for the rest of that calendar year and all of the following year. A single large bonus or commission run can do this.

Finally, there are two different under-$2,500 pay-with-return tests, and mixing them up is a recurring audit gap:

At year-end the LLC furnishes Forms W-2 to employees and files Copy A plus Form W-3 with the Social Security Administration — not the IRS. The payer name and EIN on the W-2/W-3 set must match the EIN used on Forms 941 or 944, which is exactly why the Subtitle C rule matters: it is the LLC's EIN on every wage document. For 2026 wages, both the SSA filing and the employee copies are due by February 1, 2027.

The IRS now applies a 10-return e-file threshold counted across combined information returns — W-2s, 1099s, and the rest — so most employers must e-file the W-2 set rather than mail paper.

Outsourcing does not move the risk. The W-2/W-3 instructions state that using a payroll provider or reporting agent does not relieve the employer of responsibility for filing correct, on-time W-2s and W-3, and section 3403 keeps liability for the withheld tax on the employer. A provider that misses a deposit leaves the penalty on the LLC.

The Subtitle C separation is payroll-only. For income tax the LLC remains disregarded — a branch or division of its owner — so a US employee's work is attributed straight to the foreign owner. Hiring a real US employee is therefore not just a payroll event; it is usually the moment the owner's own US income-tax analysis changes.

Under domestic law, being engaged in a US trade or business includes the performance of personal services in the United States, subject to narrow exceptions. The regulations treat an employee of a foreign person as ordinarily a dependent agent, and they attribute an office or fixed place of business to the foreign principal where a non-independent agent regularly negotiates and concludes contracts in the principal's name or regularly fills orders from inventory — including an employee who regularly carries on the business through a fixed facility. A US-based salesperson, operations hire, or manager is a strong USTB fact under each of those tests. And once a foreign person is engaged in a USTB, US-source income connected with the business is generally effectively connected income under section 864(c)(3) and Reg. section 1.864-4.

Who pays what: a nonresident individual owner reports ECI at graduated rates on Form 1040-NR under section 871(b). A foreign corporate owner is taxed on ECI under section 882, and the section 884 branch profits tax can stack on top of it for effectively connected earnings — a second layer that does not change the payroll filings but materially changes the owner's exposure.

Treaties can narrow this, but only after a treaty-specific permanent establishment analysis: a dependent agent who habitually exercises authority to conclude contracts that bind the foreign enterprise, or a fixed place of business, generally creates a PE. The practical bottom line is symmetrical — the LLC files the payroll returns as the employer, and the owner frequently acquires US business-tax exposure on the income side the day a real US employee starts.

State payroll compliance is a second stack on top of the federal one, and it splits into state unemployment insurance (UI) and state income-tax withholding — frequently administered by different agencies within the same state.

The controlling geography is the state where the employee works, not the state where the LLC was formed. A Wyoming or Delaware LLC whose employee works from another state registers for UI and, where applicable, withholding in the work state; the federal filings do not change, but the state obligations attach where the labor physically happens. That is also how unemployment claims are administered.

Because the rules are intensely state-specific, the clean research path is the directories: the Department of Labor maintains a state-by-state UI tax directory, and the Federation of Tax Administrators maintains the directory of state revenue agencies and their withholding forms. Register with the work-state agencies before or at the first payroll run.