How Do You Run Payroll for One Employee?

Running payroll for even a single employee involves navigating legal and financial responsibilities. It encompasses tax obligations, record-keeping duties, and compliance with federal and state regulations. Establishing a robust payroll process from the outset is important for any business to ensure accuracy and avoid penalties. This guide details the practical steps to manage payroll effectively for one employee, from initial setup to ongoing tax payments and reporting.

Employer Setup and Employee Information Gathering

Before any wages are disbursed, employers must complete several foundational steps to ensure compliance with federal and state regulations. A crucial initial requirement is obtaining a Federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This nine-digit number acts as a unique identifier for tax purposes, similar to a Social Security Number for individuals, and is needed for hiring employees, filing taxes, and opening business bank accounts.

The EIN application process can be completed online directly through the IRS website, often providing the EIN immediately upon approval. Alternatively, employers can apply by faxing or mailing Form SS-4, Application for Employer Identification Number. During the application, specific details about the business, such as its legal name, address, entity type, and the responsible party’s taxpayer identification number, are required.

Beyond federal registration, employers must also register with relevant state agencies. This includes establishing accounts for state unemployment insurance and state income tax withholding, as these vary by state and are necessary for proper tax remittance. Many states require employers to register for these accounts as soon as they hire their first employee.

Once employer registrations are complete, essential information must be gathered from the new employee. Form W-4, Employee’s Withholding Certificate, is a key document that employees complete to inform their employer how much federal income tax should be withheld from their paychecks. This form requires the employee to indicate their tax situation, such as filing status and any adjustments for dependents or other income, which the employer then uses to calculate the correct withholding amount.

Another mandatory form is the Form I-9, Employment Eligibility Verification. This form is used to verify the identity and employment authorization of individuals hired for employment in the United States. Both the employee and employer must complete specific sections of the form, and the employee must present acceptable documents that establish their identity and eligibility to work. Employers are required to examine these documents and attest that the documents appear genuine and relate to the person presenting them.

Additionally, employers should consider setting up a dedicated bank account for payroll to streamline financial management. Researching workers’ compensation insurance requirements in the specific state of operation is also important, as nearly every state mandates this coverage. Penalties for non-compliance can be substantial, including fines or even criminal charges.

Calculating Wages and Deductions

The process of payroll involves determining the gross pay, applying necessary deductions, and arriving at the net pay for each payroll period. Gross pay represents the total earnings of an employee before any taxes or other deductions are subtracted. This is calculated based on the employee’s agreed-upon compensation structure, whether it is an hourly rate, a fixed salary, or includes additional components like overtime or bonuses.

Federal income tax withholding is a primary deduction, with the amount determined by the information provided on the employee’s Form W-4 and the IRS withholding tables. Employers can refer to IRS Publication 15, also known as Circular E, Employer’s Tax Guide, which provides detailed guidelines.

FICA taxes, which fund Social Security and Medicare, are mandatory federal payroll taxes shared by both the employee and employer. For 2025, the Social Security tax rate is 6.2% for both, applied to wages up to an annual limit of $176,100. The Medicare tax rate is 1.45% for both, with no wage base limit. An additional Medicare tax of 0.9% applies to employee wages exceeding certain thresholds, such as $200,000 for single filers, though this additional tax is only paid by the employee.

State income tax withholding is another common deduction, applicable in most states that levy a state income tax. The calculation for state income tax generally follows a similar principle to federal income tax, using state-specific withholding forms and tables. The specific rates and rules for state withholding vary considerably by jurisdiction.

Beyond federal and state income taxes and FICA, other deductions may apply, reducing the employee’s net pay. These can include court-ordered wage garnishments, such as for child support, or voluntary deductions for benefits like health insurance premiums, retirement contributions, or other employee-elected programs. Each of these deductions must be accurately calculated according to legal requirements or employee authorizations.

Paying Taxes and Filing Reports

After calculating wages and deductions for each payroll period, the next phase involves the timely payment of taxes and the submission of required reports to government agencies. Federal income tax withheld and both the employee and employer shares of FICA taxes must be deposited with the U.S. Treasury. The Electronic Federal Tax Payment System (EFTPS) is the mandatory method for making these federal tax deposits.

The frequency of these deposits, whether monthly or semi-weekly, depends on the employer’s total tax liability from a lookback period. Employers with a smaller tax liability typically follow a monthly deposit schedule, while those with larger liabilities will be on a semi-weekly schedule. It is important to adhere strictly to the assigned deposit schedule to avoid penalties.

Employers are also required to file Form 941, Employer’s Quarterly Federal Tax Return, which summarizes the federal income tax, Social Security tax, and Medicare tax withheld from employee wages, along with the employer’s share of FICA taxes. This form is filed quarterly, with due dates typically falling on April 30, July 31, October 31, and January 31 for the preceding calendar quarter.

Another annual federal filing requirement is Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. This form reports the employer’s federal unemployment tax liability. FUTA tax is paid solely by the employer and is typically 0.6% on the first $7,000 of wages paid to each employee annually. Form 940 is due by January 31 of the year following the tax year.

At the close of each calendar year, employers must provide each employee with Form W-2, Wage and Tax Statement. This form details the employee’s annual wages and the amount of federal, state, and local taxes withheld. Employers must furnish Form W-2 to employees by January 31 of the following year. A copy of each W-2, along with Form W-3, Transmittal of Wage and Tax Statements, must also be filed with the Social Security Administration (SSA) by January 31.

State tax payments and filings follow similar procedural aspects, requiring employers to remit state withholding taxes and state unemployment taxes to the respective state agencies according to their established schedules. These state-specific requirements vary, so employers must consult their state’s tax department for precise payment methods and filing deadlines.

Maintaining meticulous payroll records is a fundamental aspect of compliance. Employers must retain all employment tax records for at least four years after the date the tax becomes due or is paid, whichever is later. These records should include details such as the employee’s name, address, Social Security number, dates of employment, amounts and dates of wage payments, and copies of all tax forms filed and deposit confirmations. Accurate record-keeping ensures that information is readily available for potential IRS review or audit.