Running a small business, even if it’s just you, means you’re wearing all the hats – and one of the most crucial, yet often overlooked, is payroll.

Yes, even with just one employee which might be you as the owner if structured correctly, or a single hire, understanding payroll isn’t optional.

It’s a fundamental requirement to stay compliant and avoid unnecessary headaches.

The direct answer is that payroll for a small business with one employee involves calculating wages, withholding taxes federal, state, and local, paying those taxes to the correct agencies, and filing periodic reports, just like a larger company would, albeit on a smaller scale.

Neglecting these steps can lead to significant penalties, interest charges, and legal issues down the line, turning what should be a straightforward process into a costly ordeal. This isn’t just about paying someone.

0.0

0.0 out of 5 stars (based on 0 reviews)

Excellent0%

Very good0%

Average0%

Poor0%

Terrible0%

There are no reviews yet. Be the first one to write one.

Amazon.com: Check Amazon for Payroll for small
Latest Discussions & Reviews:

It’s about adhering to a complex web of regulations that govern employer-employee relationships and financial transparency, ensuring both the business and the employee are protected and operating within the law.

Table of Contents

The Absolute Essentials of Payroll for a Single Employee

Alright, let’s cut to the chase.

You’ve got one employee – maybe it’s your first hire, or maybe you’re just now realizing how to properly pay yourself as an S-Corp owner.

Whatever the scenario, payroll isn’t something you can eyeball. It’s about precision and compliance.

Think of it like a carefully calibrated machine: if one gear is off, the whole thing grinds to a halt.

The essentials boil down to understanding wages, taxes, and reporting. Freshbooks payroll

Distinguishing Between Employee and Independent Contractor

This is step zero, and it’s critical. The IRS has strict guidelines.

Misclassifying an employee as an independent contractor can lead to serious penalties, back taxes, and legal challenges. The core difference often comes down to control.

Employee: You dictate what work is done, how it’s done, when it’s done, and where it’s done. You provide tools, training, and typically pay a regular wage.
Independent Contractor: They control how and when the work is done. They typically provide their own tools, work for multiple clients, and are paid per project or task.

The IRS uses a three-factor test:
* Behavioral Control: Who directs and controls how the worker does the task?
* Financial Control: Who controls the business aspects of the worker’s job e.g., how the worker is paid, whether expenses are reimbursed, who provides tools?
* Type of Relationship: Are there written contracts? Benefits? Is the relationship permanent?

If you get this wrong, the IRS might hit you with fines, interest on unpaid employment taxes, and even criminal penalties in severe cases.

According to IRS data, misclassification audits are on the rise, with billions in taxes and penalties collected annually. Don’t risk it. Hris and payroll systems

Understanding Gross vs. Net Pay

This is the bread and butter of payroll.

Gross Pay: This is the total amount an employee earns before any deductions. It’s their hourly wage multiplied by hours worked, or their annual salary. For instance, if your employee earns $25/hour and works 40 hours, their gross pay is $1,000 for the week.
Net Pay Take-Home Pay: This is the amount the employee actually receives after all mandatory and voluntary deductions are taken out. This is what hits their bank account.

The difference between gross and net can be significant.

A common mistake for new business owners is only thinking about the gross pay, forgetting about the hefty chunk that goes to taxes.

Essential Federal Tax Withholdings

Welcome to the exciting world of Uncle Sam’s share! For a single employee, you’ll primarily be concerned with:

Federal Income Tax FIT: Based on the employee’s W-4 form, which indicates their filing status and allowances. This is progressive, meaning higher earners pay a higher percentage.
Social Security Tax: As of 2024, this is 6.2% for both the employee and employer, up to an annual wage base limit of $168,600. So, for every dollar your employee earns, you pay 6.2 cents and they pay 6.2 cents, totaling 12.4%.
Medicare Tax: As of 2024, this is 1.45% for both the employee and employer, with no wage base limit. This totals 2.9%.

Collectively, Social Security and Medicare taxes are known as FICA taxes. These aren’t optional, and they add a substantial cost on top of the employee’s gross wage. For example, on a $1,000 gross paycheck, you’re looking at an additional $76.50 $62 for Social Security + $14.50 for Medicare in employer FICA contributions, plus you’re responsible for withholding the employee’s portion. Payroll checks for small business

Setting Up Your Payroll System: Manual vs. Software

Deciding how to process payroll is crucial.

For one employee, you might think “manual,” but even that has its complexities.

The goal is efficiency, accuracy, and compliance, not just saving a few bucks upfront.

Manual Payroll: The DIY Route Handle With Extreme Caution

Yes, you can do it manually. This involves:

Calculating gross wages for each pay period.
Looking up federal income tax withholding tables based on the employee’s W-4.
Calculating FICA taxes Social Security and Medicare.
Calculating state and local taxes if applicable.
Issuing paychecks or direct deposits, which are harder manually.
Tracking all withholdings and employer contributions.
Depositing taxes with the IRS and state agencies on time.
Filing quarterly Form 941 and annual Form 940, W-2 reports.

Pros: No direct software cost.
Cons:
* Time-Consuming: This takes significant time, especially for a non-expert. Imagine spending hours just to process one paycheck.
* High Error Rate: The chances of miscalculating taxes, missing a deposit deadline, or misfiling a form are incredibly high. Each error can lead to penalties. The IRS assesses billions in penalties for payroll errors annually.
* Lack of Compliance Knowledge: Tax laws change constantly. Keeping up with federal, state, and local regulations is a full-time job. Did you know states often have specific rules for new hires e.g., reporting to state new hire registries within 20 days?
* No Audit Trail: Manual records can be messy and difficult to audit if the IRS comes knocking. Payroll cost

Frankly, for even one employee, manual payroll is akin to building a house from scratch without blueprints or power tools. It’s technically possible, but why would you?

Payroll Software and Services: The Smart Choice

This is where most small business owners, even with one employee, find peace of mind.

Payroll software automates calculations, reminders, and filings.

Key Features to Look For:

Automated Tax Calculations: This is huge. The software figures out federal, state, and local taxes based on employee input and current tax laws.
Tax Filing and Deposit Services: Many services will actually file and deposit your payroll taxes for you, eliminating one of the biggest compliance headaches.
Direct Deposit: Employees appreciate getting paid directly into their bank accounts.
New Hire Reporting: Automatically reports new hires to relevant state agencies.
Reporting Capabilities: Generates W-2s, 941s, 940s, and other necessary forms.
Time Tracking Integration: Some services integrate with time tracking tools, making it easy to input hours.
Compliance Alerts: Notifies you of changes in tax laws or upcoming deadlines.

Popular Options for Small Businesses and 1 employee: Best hr for small business

Gusto: Known for its user-friendly interface and comprehensive features, including benefits administration. Starts around $40/month plus $6/employee.
QuickBooks Payroll: Integrates seamlessly if you already use QuickBooks accounting. Various tiers, starting around $45/month plus $5/employee.
ADP Run: A more established player, offering robust features and scalability, though sometimes pricier. Basic plans start around $79/month.
OnPay: Offers a flat fee $40/month + $6/employee with all features included, simple pricing.

While there’s a monthly fee, consider it an investment in time savings, accuracy, and peace of mind.

The cost of a single payroll error or missed deadline can easily outweigh years of software subscriptions.

A 2023 survey indicated that businesses that automate payroll reduce their error rate by over 60%.

State and Local Payroll Considerations

It’s not just the feds you need to worry about.

States and some local jurisdictions have their own rules. Workful cost

Ignoring these can be just as costly as ignoring the IRS.

State Income Tax Withholding

Most states 41, plus D.C. have state income tax.

The rates and withholding methods vary significantly.

Varying Rates: Some states have flat income tax rates e.g., Pennsylvania, while others have progressive rates e.g., California, New York. Nine states have no state income tax at all Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming.
State W-4 Equivalents: Employees will often need to fill out a state-specific withholding form similar to a federal W-4.
Deposit Schedules: Like federal taxes, state taxes have specific deposit schedules e.g., monthly, semi-weekly, which might differ from federal ones.

For example, if your single employee is in California, you’ll withhold California Personal Income Tax PIT, State Disability Insurance SDI, and State Unemployment Insurance SUI, though this is usually an employer-only contribution. If they’re in Texas, you’ll generally only have federal withholdings.

State Unemployment Insurance SUI

This is a big one. Payroll processing services

SUI is an employer-funded tax that provides temporary income to eligible workers who lose their jobs through no fault of their own.

Employer-Paid: In most states, SUI is paid solely by the employer. A few states, like Alaska, New Jersey, and Pennsylvania, also require employee contributions.
Wage Base and Rate: Each state sets its own taxable wage base the maximum earnings subject to SUI tax and a percentage rate. New businesses typically start with a standard “new employer” rate, which can range from under 1% to over 5%. Over time, your rate can increase or decrease based on your unemployment claim history known as “experience rating”.
Reporting: You’ll typically file quarterly SUI reports with your state’s unemployment agency.

Missing SUI payments or reports can lead to penalties and a higher experience rate, costing you more in the long run.

Local Taxes and Specific Regulations

Don’t forget local taxes! While not universal, some cities or counties impose their own income taxes, occupational privilege taxes, or local services taxes.

Examples: Cities like Philadelphia, New York City MTA surcharge, and Denver have local income taxes. Many municipalities in Ohio and Pennsylvania have local income taxes.
Research: It’s crucial to research local payroll tax requirements based on your business location and where your employee lives and works. Your payroll software should handle this, but it’s good to be aware.

The complexity here is why robust payroll software is almost a non-negotiable, even for one employee.

It tracks these nuances, ensuring you’re compliant from federal down to local levels. Direct deposit payroll provider

Tax Payments and Filing Requirements

This is where the rubber meets the road. Calculating taxes is one thing.

Paying them correctly and on time, and then reporting those payments, is the real challenge for many new business owners.

Federal Tax Deposits: Form 941 and EFTPS

You don’t just “save up” the taxes you withhold and owe. The IRS wants its money frequently.

Form 941 Employer’s Quarterly Federal Tax Return: This form reports your total wages paid, federal income tax withheld, and both employee and employer portions of Social Security and Medicare taxes for the quarter. It’s generally due by the last day of the month following the end of the quarter April 30, July 31, October 31, January 31.
Deposit Schedule: Based on the total amount of federal employment taxes reported on Form 941, you’ll be assigned a monthly or semi-weekly deposit schedule.
- Monthly Schedule: If your total taxes for the prior 12 months were $50,000 or less, you deposit taxes by the 15th of the next month.
- Semi-weekly Schedule: If your total taxes for the prior 12 months were more than $50,000, you deposit taxes more frequently e.g., for paydays on Wednesday, Thursday, or Friday, deposit by the following Wednesday. for paydays on Saturday, Sunday, Monday, or Tuesday, deposit by the following Friday.
- $100,000 Rule: If you accumulate $100,000 or more in federal employment taxes on any day, you must deposit them by the next business day, regardless of your regular schedule.
EFTPS Electronic Federal Tax Payment System: You must deposit federal taxes electronically, usually through EFTPS. This is a free service from the Treasury Department. Set it up early, as it takes time to get activated.

Missing a deposit deadline or depositing the wrong amount can result in penalties of 2% to 15% of the underpaid amount, depending on how late the payment is.

Federal Unemployment Tax Act FUTA: Form 940

FUTA is another employer-only tax that funds unemployment benefits. Payroll company uk

Employer-Paid: Like SUI, FUTA is paid solely by the employer.
Rate: The federal FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. However, you can typically claim a credit of up to 5.4% for SUI taxes paid on time, reducing your effective FUTA rate to 0.6%. So, maximum FUTA per employee is typically $42 $7,000 x 0.006.
Deposit Schedule: You generally deposit FUTA taxes quarterly if your liability for the quarter is more than $500. If it’s $500 or less, you carry it over to the next quarter until the cumulative liability exceeds $500.
Form 940 Employer’s Annual Federal Unemployment FUTA Tax Return: This form reports your FUTA liability for the entire year and is due by January 31 of the following year.

Even with one employee, you need to track and pay FUTA.

Annual Filings: W-2 and Other Forms

The end of the year brings its own set of forms.

Form W-2 Wage and Tax Statement: You must provide each employee with a W-2 form by January 31 of the following year. This form reports their annual wages and taxes withheld. You also send a copy to the Social Security Administration SSA.
Other Potential Forms: Depending on your business structure or specific circumstances, you might need other forms:
- Form 1099-NEC Nonemployee Compensation: If you pay independent contractors $600 or more, you’ll issue this form.
- State Annual Reconciliation Forms: Many states require an annual reconciliation of state income taxes withheld.

The penalties for not filing W-2s or 1099-NECs on time, or for filing incorrect information, can range from $60 to $310 per form, depending on how late you are.

With payroll software, these forms are typically generated and often filed for you.

Crucial Legal and Compliance Aspects

Payroll isn’t just about taxes. it’s also about adhering to labor laws. Simple payroll

Even with one employee, you’re subject to numerous federal and state regulations designed to protect workers.

Federal Labor Laws: FLSA, OSHA, EEO

These are broad strokes, but critical to understand.

Fair Labor Standards Act FLSA: This is the granddaddy of federal labor laws. It governs:
- Minimum Wage: As of 2024, the federal minimum wage is $7.25 per hour. However, many states and cities have much higher minimum wages e.g., over $16/hour in some areas of California and New York. You must pay the higher of the federal, state, or local minimum wage.
- Overtime Pay: Non-exempt employees must be paid 1.5 times their regular rate for all hours worked over 40 in a workweek. Getting this wrong is a common and costly mistake.
- Child Labor: Strict rules apply to employing minors.
- Recordkeeping: FLSA requires you to keep detailed records of hours worked, wages paid, and other employment data.
Occupational Safety and Health Act OSHA: Even for one employee, you are responsible for providing a safe workplace free from recognized hazards. This applies to office settings, retail, or any other environment.
Equal Employment Opportunity EEO Laws: Prohibit discrimination based on race, color, religion, sex including sexual orientation and gender identity, national origin, age 40 or older, disability, or genetic information. While some EEO laws apply only to employers with 15 or more employees, many core anti-discrimination principles apply regardless of size.

A single lawsuit for wage and hour violations under FLSA, or for discrimination, can bankrupt a small business.

Legal fees alone can easily run into the tens of thousands.

State-Specific Labor Laws

This is where things get even more localized and complex. Workful alternatives

States often have their own versions of federal laws, sometimes offering greater protections.

State Minimum Wage and Overtime: As mentioned, many states have higher minimum wages than the federal rate. Some states also have daily overtime rules e.g., California requires overtime after 8 hours in a day.
Paid Sick Leave and Paid Family Leave: A growing number of states and cities mandate paid sick leave. Some states e.g., California, New York, Washington also have paid family leave programs, often funded by employee payroll deductions.
Workers’ Compensation Insurance: Almost all states require employers to carry workers’ compensation insurance, even for one employee. This covers medical costs and lost wages for employees injured on the job. Premiums are based on payroll and the type of work.
New Hire Reporting: Most states require employers to report new hires to a state agency within a short period e.g., 20 days. This is primarily to help enforce child support orders.
Final Paycheck Laws: Many states have strict rules about when a final paycheck must be issued to a terminated employee e.g., immediately upon termination in California, or within a few days.

This patchwork of state laws is why generic payroll advice is insufficient.

You need to know your specific state’s rules, which again, is where specialized payroll software earns its keep.

Best Practices and Tips for a Solo Employee Payroll

Even with just one person on the payroll, good habits save you grief.

Think of these as your guardrails against costly mistakes. Adp for payroll

Maintain Impeccable Records

This is non-negotiable.

If the IRS or state labor department audits you, your records are your defense.

Employee Information: W-4, I-9, offer letters, employment contracts.
Payroll Registers: Detailed records of gross pay, deductions, net pay for each pay period.
Time Cards/Sheets: Proof of hours worked, especially for hourly employees.
Tax Deposit Records: Proof that you remitted taxes on time.
Filed Forms: Copies of all 941s, 940s, W-2s, and state filings.
Retention: The FLSA requires payroll records to be kept for at least three years. Tax records, however, should typically be kept for at least four years after the tax due date or payment date, whichever is later. Some experts recommend seven years for most tax documents.

Digital records are often best as they can be easily backed up and are searchable.

Separate Business Finances

This isn’t just a payroll tip. it’s a fundamental business principle.

Dedicated Bank Account: All business income and expenses, including payroll, should flow through a separate business bank account.
Business Credit Card: Use a business credit card for business expenses only.
Why? It simplifies recordkeeping, makes tax preparation easier, protects your personal assets in case of a lawsuit against your business, and gives you a clear picture of your business’s financial health. Co-mingling funds is a red flag for the IRS and can undermine your legal protections as a business entity.

Don’t Forget the Employer’s Tax Burden

New business owners often budget for the employee’s salary but forget about the employer’s share of payroll taxes. Payroll free trial

FICA Match: As discussed, you pay 6.2% for Social Security and 1.45% for Medicare on top of the employee’s gross wage. That’s an immediate 7.65% increase to your employee cost.
FUTA: Another 0.6% effectively on the first $7,000 of wages.
SUI: State unemployment taxes, which can vary widely e.g., a new employer in California might pay 3.4% on the first $7,000, adding $238 per employee per year just for SUI.
Workers’ Comp: This can be a significant cost, depending on your industry and state. For a low-risk office job, it might be relatively low. for a high-risk manual labor job, it could be thousands annually.
Budgeting: When planning your employee’s compensation, always factor in an additional 10-20% on top of their gross pay to cover employer taxes and workers’ comp. For a $50,000 salary, this could be an additional $5,000 to $10,000 in employer costs annually.

Consider Professional Help Even with One Employee

While payroll software automates a lot, a professional can provide guidance.

Accountant/CPA: They can help you set up your initial payroll system, advise on state and local nuances, and ensure your overall financial strategy is sound. They can also review your reports and filings.
Payroll Service Bureau: If you truly want hands-off, a full-service payroll bureau like ADP or Paychex, or even smaller local ones will handle everything for you – calculations, deposits, filings, W-2s. This is typically the most expensive option but offers maximum peace of mind.

Even for one employee, the hidden costs of compliance errors penalties, interest, legal fees can far outweigh the cost of good software or professional advice.

It’s an investment in keeping your business healthy and compliant.

Frequently Asked Questions

What exactly is payroll for a small business with 1 employee?

Payroll for a small business with 1 employee involves calculating the employee’s gross wages, withholding the correct amount of federal, state, and local taxes, remitting those withheld taxes to the proper government agencies, paying the employer’s share of taxes like FICA, FUTA, and SUI, and filing various tax forms like Form 941, Form 940, and W-2s on time.

Do I really need to do payroll if I only have one employee?

Yes, absolutely. Adp payroll cost for small business

Even with one employee, you are legally obligated to comply with all federal, state, and local payroll and labor laws, including withholding taxes, paying employer taxes, and filing reports.

There are no exceptions for having a small number of employees.

How much does it cost to do payroll for 1 employee?

The cost varies.

Manual payroll is “free” but carries a high risk of errors and penalties.

Payroll software services typically range from $40 to $70 per month for a base plan plus an additional $5 to $10 per employee per month. Adp small business payroll

So, for one employee, you’re looking at $45-$80 per month for a reliable software solution.

Can I just pay my single employee as an independent contractor?

You should not unless they truly meet the IRS definition of an independent contractor.

Misclassifying an employee as an independent contractor can lead to significant penalties, back taxes, and legal issues from the IRS and state labor departments.

The IRS uses specific criteria based on behavioral control, financial control, and the type of relationship.

What federal taxes do I need to withhold for my employee?

You need to withhold federal income tax based on their W-4, Social Security tax 6.2% of gross wages up to the annual limit, and Medicare tax 1.45% of all gross wages. Together, Social Security and Medicare taxes are known as FICA taxes.

What federal taxes do I as the employer have to pay for my employee?

As the employer, you must pay a matching portion of FICA taxes 6.2% for Social Security and 1.45% for Medicare, which totals 7.65% of the employee’s gross wages.

You also pay Federal Unemployment Tax Act FUTA tax, which is 6.0% on the first $7,000 of wages, though this is often effectively reduced to 0.6% due to state unemployment tax credits.

What forms do I need to file for payroll with one employee?

Federally, you’ll primarily file Form 941 quarterly Employer’s Quarterly Federal Tax Return and Form 940 annually Employer’s Annual Federal Unemployment FUTA Tax Return. You’ll also issue Form W-2 to your employee by January 31st of the following year and send a copy to the Social Security Administration. State forms will vary.

How often do I have to deposit federal payroll taxes?

Your federal tax deposit schedule monthly or semi-weekly is determined by your total tax liability from the previous year, as reported on Form 941. If your total taxes for the prior 12 months were $50,000 or less, you’ll generally deposit monthly. If over $50,000, you’ll deposit semi-weekly.

All deposits must be made electronically via EFTPS.

Do I need to worry about state taxes for one employee?

Most states have state income tax withholding requirements, state unemployment insurance SUI taxes, and sometimes state-mandated paid sick leave or paid family leave contributions.

You’ll need to register with your state’s revenue and unemployment agencies.

What about local taxes?

Some cities, counties, or other local jurisdictions impose their own income taxes, occupational privilege taxes, or other specific fees.

You must research the requirements for your specific business location and your employee’s residence.

Is workers’ compensation insurance required for one employee?

In almost all states, yes, workers’ compensation insurance is mandatory for employers, even those with only one employee.

This insurance covers medical costs and lost wages if an employee is injured on the job.

How do I get an Employer Identification Number EIN?

You can get an EIN Employer Identification Number for free directly from the IRS website.

It’s a quick online application process and is required for all businesses with employees.

Should I use manual payroll or payroll software for a single employee?

For accuracy, compliance, and time savings, payroll software is highly recommended, even for just one employee.

Manual payroll is prone to errors, time-consuming, and makes it difficult to stay updated on ever-changing tax laws.

What records do I need to keep for payroll?

You need to keep detailed records of hours worked if hourly, gross pay, all deductions, net pay, tax deposits made, and copies of all filed forms W-4s, W-2s, 941s, 940s, state forms. Keep theseundefined

Payroll for small business with 1 employee