How Much Is Payroll for One Employee?

When an employer hires an individual, the financial commitment extends beyond the agreed-upon salary or hourly wage. Payroll encompasses a range of financial and administrative responsibilities that contribute to the total cost of an employee. Understanding these components is important for effective financial planning and compliance with legal requirements.

Understanding Payroll Cost Components

Gross wages represent the total amount an employee earns before any deductions. This includes regular pay, overtime, bonuses, commissions, and paid time off.

Employee-withheld taxes are amounts deducted directly from an employee’s gross pay. Federal Income Tax (FIT) withholding is determined by the employee’s Form W-4. State Income Tax (SIT) withholding, where applicable, functions similarly, depending on state-specific rules. Federal Insurance Contributions Act (FICA) taxes, comprising Social Security and Medicare, are also withheld. Social Security funds retirement, disability, and survivor benefits, while Medicare contributes to healthcare for the elderly and disabled.

Beyond employee withholdings, employers incur their own set of payroll taxes. The Federal Unemployment Tax Act (FUTA) requires employers to pay a federal tax that helps fund state unemployment agencies and extended unemployment benefits. Similarly, the State Unemployment Tax Act (SUTA), also known as State Unemployment Insurance (SUI), is an employer-paid tax that funds state unemployment benefits.

Additional costs can further increase the total expense of an employee. These may include employer contributions to health insurance premiums, retirement plans like 401(k)s, and workers’ compensation insurance, which covers job-related injuries or illnesses. If a business uses a third-party payroll service, administrative fees also contribute to the overall cost.

Calculating Employee Payroll

Gross wages are calculated based on the employee’s pay structure. For hourly employees, gross pay is determined by multiplying the hourly rate by hours worked, including overtime. Salaried employees typically have their annual salary divided by the number of pay periods to arrive at their gross pay per period.

Federal income tax withholding is calculated using information from the employee’s Form W-4 and IRS tax withholding tables or software. State income tax withholding follows a similar process, relying on state-specific forms and tax rates. These calculations help ensure taxes are paid throughout the year.

FICA taxes involve specific rates for both Social Security and Medicare. The Social Security tax rate is 6.2% for both the employee and employer, applied to wages up to an annual limit. There is no wage base limit for Medicare tax, with a rate of 1.45% for both employee and employer on all wages. An additional Medicare tax of 0.9% applies to individual wages exceeding a certain threshold, which is withheld from the employee’s pay but not matched by the employer.

FUTA tax is generally 6.0% on the first $7,000 of each employee’s wages per year. Employers typically receive a credit of up to 5.4% for timely state unemployment contributions, effectively reducing the FUTA rate to 0.6% for most employers. SUTA rates vary significantly by state and are often “experience-rated,” meaning an employer’s specific rate can fluctuate based on their history of unemployment claims. States also have their own wage bases for SUTA, which differ from the federal FUTA wage base.

After all applicable deductions and withholdings are calculated, the employee’s net pay, or “take-home pay,” is determined. The total cost to the employer for one employee includes gross wages, plus the employer’s share of FICA, FUTA, and SUTA taxes, along with any employer-provided benefits and administrative fees.

Fulfilling Employer Payroll Obligations

After calculating payroll, employers are responsible for accurately withholding and remitting taxes to the appropriate federal and state agencies. This includes both employee-withheld taxes and employer matching contributions. Payments for federal taxes, such as FICA and federal income tax withholding, are typically made to the IRS, while state taxes are remitted to state tax departments.

Federal tax deposit schedules depend on the total tax liability. Employers with smaller liabilities may deposit monthly, while those with larger liabilities might be required to deposit semi-weekly. State tax agencies also have their own payment schedules, which can vary.

Employers must fulfill various reporting requirements. Quarterly, Form 941, Employer’s Quarterly Federal Tax Return, is filed to report withheld income, Social Security, and Medicare taxes. Annually, Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is submitted to report FUTA tax. Employers also issue Form W-2, Wage and Tax Statement, to each employee by January 31st of the following year, detailing wages and taxes withheld, and submit copies to the Social Security Administration. State-specific reporting requirements also apply, often involving similar quarterly or annual filings to report state income and unemployment taxes.

Accurate record keeping is a statutory requirement for employers. Businesses must maintain detailed payroll records for a specified duration, including information like hours worked, pay rates, and deductions. These records are important for compliance, audits, and resolving discrepancies.

Establishing Payroll Systems

Before processing payroll, employers must complete several administrative setup steps. Obtaining an Employer Identification Number (EIN) from the IRS is a requirement. This nine-digit number acts as a federal tax ID for businesses.

Beyond federal registration, employers must register with relevant state agencies. This involves obtaining state tax IDs for state income tax withholding, if the state has an income tax, and for state unemployment insurance. These registrations ensure the business can properly remit state-level payroll taxes and comply with state regulations.

New hire reporting is another administrative step. Federal law requires employers to report newly hired employees to state agencies within a specified timeframe. This reporting helps states enforce child support orders and monitor unemployment benefits.

Employers have several options for managing payroll, each with different implications for time and accuracy. Manual payroll processing involves significant complexity and a high risk of errors due to manual calculations and tracking. Payroll software automates many calculations, generates necessary forms, and helps with compliance, reducing the burden on employers. Alternatively, engaging a payroll service provider can outsource the entire payroll function, handling calculations, tax remittances, and reporting, which can minimize administrative burden.