Understanding Payroll for One Employee: A Comprehensive Guide

Officially bringing on your first employee is an exciting benchmark to growing your small business, being in charge of payroll. Even when setting up payroll for one employee, you'll need to stay compliant with various requirements and process paychecks correctly and on time.

Many business owners find themselves in this position after years of going solo or working with contractors — maybe you're a freelancer who needs support, or your business has grown enough to bring someone on board. Whatever your situation, putting the proper process in place for single-employee payroll for your small business from the start can save you time and trouble down the line.

Why Set Up Payroll for One Employee?

Payroll processing for one hire is more than simply cutting a check. You'll also juggle legal requirements, tax obligations, and the need to keep solid records. It's not the most glamorous part of running a business, but getting it right now can mean fewer headaches later.

Legal and Compliance Considerations for Single-Employee Payroll

The laws and regulations that businesses must consider when paying employees don't have a "lite" version for small teams. Managing single-employee payroll could come with the same compliance burden as managing a staff of 50 — you're in the deep end from day one. Before you run payroll, make sure you've filed the correct forms, classified employees correctly, and are current with tax rules. Employers must follow strict recordkeeping under the Fair Labor Standards Act (FLSA). That means holding onto payroll records for at least 3 years—and keeping timecards, schedules, and related documents for two.

Then there's compliance with state and local labor laws to contend with. You need to pay at least the higher of the state or local minimum wage and be cautious about any overtime rules that are more generous than the requirements under federal law.

How To Set Up and Run Payroll for One Employee

Learning how to set up payroll for one employee involves a few steps. Here's some best practices on how to do payroll for one employee:

1. Get set up: Start by applying for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) — it's free and only takes a few minutes online. You may then need to fill out state registration forms. Then, gather employee paperwork: W-4 (for tax withholding), I-9 (for work eligibility), and any direct deposit forms. You'll also want to think about how often you need to run payroll. Weekly might be better for cash flow but less frequent periods, such as biweekly, can be simpler to manage.
2. Calculate the paycheck: Figure out the employee's gross pay and subtract the required payroll deductions like federal income tax, Social Security, and Medicare. What's left is the take-home pay your employee sees.
3. Send the payment: Determine how employees need to be paid. Many small businesses prefer direct deposit because it's faster and doesn't require a trip to the bank, but printed checks work, too. Just make sure to follow any applicable requirements and issue payments on time, every time.
4. Manage payroll tax filings: You're responsible for submitting payroll taxes, both federal and (if applicable) state/ and local. Most employers do this quarterly, but it can vary based on your jurisdiction. The IRS recommends keeping tax records for four years, though some experts say longer is better.
5. Choose a payroll process: You can run payroll manually using spreadsheets, but that can get risky. Software often catches the errors you'd miss, and many tools are surprisingly affordable — even for tiny teams.
6. Stay current with the rules: The laws and regulations that govern how employers pay employees can change. Make it a habit to stay informed and keep your records organized. When in doubt, don't guess — a 10-minute call with your trusted advisor could save you hours later.

Cost of Payroll Service for One Employee

The cost of payroll service for one employee can vary. Generally, you can expect to pay between $30 and $100 per month, depending on whether you use software or a full-service payroll service provider. The employee pay schedule matters, too — weekly runs often cost more than bi-weekly or monthly ones, and extras like direct deposit, or tax filing services can add to the bill.

Payroll Taxes and Deductions for One Employee

Employee payroll setup might seem easy, but the process involves more than you think. For instance, there's calculating payroll taxes — at the federal level, you'll need to withhold income tax (based on the employee's W-4), along with FICA taxes: 6.2% for Social Security and 1.45% for Medicare. You'll match these same FICA amounts as the employer.

Keep in mind that state taxes can have significant differences. Some states — like Florida — don't have income tax, but others require more frequent filings. A quick check with your state's tax agency can make sure nothing slips through the cracks.

In addition to mandatory taxes, you may need to consider payroll deductions for benefits or contributions, such as health insurance or retirement plans.

Benefits of Using Payroll Services for One Employee

You might wonder if it's worth investing in payroll services with only one team member. It can be, especially if your time is limited or financial calculations are out of your comfort zone. Here's how it can help:

• Saves time: Between filing forms, calculating taxes, and issuing payments, payroll can take up more time than you expect. Payroll services take this load off your shoulders, allowing you to focus on your core operations.
• Reduces errors: Even minor errors — a decimal point in the wrong place or an incorrect tax rate — can lead to big problems. Payroll services take the guesswork out of it and use regularly updated tax tables to ensure those calculations are precise.
• Avoid penalties: If you're a small business or large corporation, the penalties for late or incorrect filings are just as severe. Payroll providers track changing regulations and deadlines, making sure everything is filed correctly and on time.
• Simplifies administrative work: Payroll services automatically calculate, withhold, and submit federal and state payroll taxes for you. They also handle year-end tax forms like W-2s and 1099s, taking the guesswork out of compliance.

Potential Challenges of Handling Payroll for One Employee

• Tax Codes: You might think managing payroll for a single staff member would be straightforward, but the tax code is complex for any business, regardless of size, and requires careful attention to detail.
• Speed and Accuracy: Time quickly becomes your scarcest resource. What starts as a simple calculation morphs into hours spent deciphering tax codes, double-checking withholding amounts, and ensuring compliance with ever-changing laws and regulations. Suddenly, that "quick payroll task" has taken over your entire afternoon — time you can never get back once it's spent on administrative tasks.
• Security and Privacy: Confidentiality and privacy issues create added concerns. You're handling sensitive personal information, from Social Security numbers to banking details and tax documents. Without proper safeguards in place, this data can be vulnerable to security breaches.