Do I Need Payroll Software for One Employee?

Payroll processing, even for a single employee, involves detailed obligations. Many small business owners wonder if specialized software is necessary when managing payroll for just one person. Hiring an employee, regardless of scale, triggers legal and tax responsibilities. Understanding these requirements and the available methods for handling payroll helps maintain compliance and avoid potential penalties.

Essential Payroll Requirements for One Employee

Employing even a single individual establishes legal and tax obligations. These responsibilities begin with federal income tax withholding, where employers must deduct taxes from an employee’s wages based on the information provided on their Form W-4. Employers are also responsible for Federal Insurance Contributions Act (FICA) taxes, which encompass Social Security and Medicare. Both the employer and employee contribute to FICA, with the Social Security portion being 6.2% each up to an annual wage base limit, and Medicare at 1.45% each on all wages with no limit. For 2025, the Social Security wage base limit is $176,100.

Beyond FICA, employers must also contribute to federal unemployment tax (FUTA) and state unemployment tax (SUTA). FUTA is an employer-only tax, generally 6.0% on the first $7,000 of an employee’s wages, though a credit for timely SUTA payments can reduce the effective federal rate significantly, often to 0.6%. SUTA rates and wage bases vary by state, and while typically an employer-only tax, a few states also require employee contributions.

Accurate record-keeping is required, including retention of payroll records for at least three years and timecards for two years under federal law. Employers must also furnish employees with Form W-2 by January 31st each year, reporting wages and withheld taxes, and file copies with the Social Security Administration. Employers must also file Form 941 to report withheld federal income tax, Social Security, and Medicare taxes, generally by the last day of the month following the end of each quarter.

Manual Payroll Explained

Processing payroll manually for a single employee involves a series of steps, beginning with the calculation of gross pay. For hourly employees, this means multiplying their hourly rate by the hours worked, including any overtime at 1.5 times the regular rate. For salaried employees, gross pay is determined by dividing their annual salary by the number of pay periods in the year. After gross pay is established, the next step involves determining all deductions and withholdings.

Federal income tax withholding is calculated using IRS tax tables and the employee’s Form W-4, which guides the employer on the amount to deduct based on filing status and adjustments. FICA taxes (Social Security and Medicare) are percentage calculations based on gross wages, with the Social Security portion subject to the annual wage base limit. Pre-tax deductions, such as health insurance premiums or retirement contributions, are subtracted next, followed by any post-tax deductions like garnishments or voluntary contributions. The remaining amount constitutes the employee’s net pay.

After calculating net pay and preparing the paycheck, employers must track all payments and deductions. This includes making timely federal tax deposits. The frequency of these deposits (monthly or semi-weekly) depends on the employer’s total tax liability from a prior lookback period.

Quarterly, employers must manually complete and file Form 941. Annually, Form 940 for FUTA and Form W-2 must be filed. State unemployment and income tax reporting also require manual completion and submission to state agencies, adhering to state requirements.

How Payroll Software Works

Payroll software automates and streamlines the process of compensating employees. At its core, the software calculates gross wages based on entered hours or salary, and then automatically computes and deducts all applicable taxes and benefit premiums. This automation reduces the potential for human error in calculations, which can be common in manual processing.

Beyond calculations, payroll software generates pay stubs, providing employees with a breakdown of their earnings and deductions. Many systems facilitate direct deposit, transferring net pay directly into employee bank accounts, eliminating the need for physical checks. These systems can prepare and file required tax forms, such as quarterly Form 941s and annual W-2s, directly with federal and state agencies, ensuring timely submission and compliance. The software also acts as a record-keeping system, storing all payroll data, employee information, and tax filings, which is important for audits and reporting. Many platforms offer employee self-service portals, allowing individuals to access pay stubs, update personal information, and view tax documents independently.

Deciding Your Payroll Method

Choosing between manual payroll and payroll software for a single employee involves weighing several considerations. One primary factor is the employer’s comfort level with numerical calculations and understanding tax regulations. Manually processing payroll demands precision and awareness of changing federal and state tax laws, wage bases, and filing deadlines. The risk of errors with manual processes is higher, and even small mistakes can lead to penalties from tax authorities.

The time commitment is another consideration. While managing one employee’s payroll might seem minimal, the procedural steps of calculating, deducting, depositing, and filing can still consume several hours each pay period and quarter. This time could otherwise be spent on core business activities. Payroll software, by contrast, automates many of these tasks, reducing the time spent on administrative duties.

The cost of payroll software ranges from $20 to $50 per month, with an additional per-employee fee of $2 to $25, depending on the provider and features. For a single employee, this could mean a monthly expense of around $25 to $75. While manual payroll has no direct software cost, the value of time saved and the mitigation of error risks can outweigh the software expense. Ultimately, the decision rests on the employer’s willingness to dedicate time and effort to ensure compliance, or to invest in a solution that minimizes these demands.