How to Process Payroll for One Employee

Processing payroll for even a single employee involves numerous steps beyond simply issuing a paycheck. Employers must understand and comply with federal, state, and potentially local regulations concerning tax withholding, reporting, and timely deposits. Navigating these requirements is essential for accurate financial record-keeping and avoiding penalties.

Initial Setup for Payroll

Before hiring an employee, businesses need to complete several foundational steps to ensure they are prepared for payroll obligations. Obtaining an Employer Identification Number (EIN) from the IRS is a primary requirement. This nine-digit number acts like a Social Security number for a business and is necessary for reporting taxes and other interactions with the IRS. Applying for an EIN can be completed online via the IRS website, typically providing the number immediately upon successful application.

Properly classifying a worker as an employee or an independent contractor is another step with significant tax implications. The IRS uses three main categories to distinguish between these classifications: behavioral control, financial control, and the type of relationship. Behavioral control examines whether the business has the right to direct or control what the worker does and how the job is performed. Financial control assesses whether the business aspects of the worker’s job are controlled by the payer, including how the worker is paid, whether expenses are reimbursed, and who provides tools or supplies. The type of relationship considers factors like written contracts, employee-type benefits (e.g., pension plans, insurance, vacation pay), and the permanency of the working arrangement. Misclassifying an employee can lead to penalties and liability for unpaid employment taxes.

Beyond federal requirements, employers also need to register with relevant state agencies. This typically includes registering for state income tax withholding, if the state has one, and for state unemployment insurance (SUI) programs. State registration processes and requirements vary, and some local jurisdictions may also have specific registration needs.

Gathering Employee Information and Calculating Pay

Once the foundational setup is complete, gathering specific information from the new employee is the next step to accurately calculate pay and withholdings. Two federal forms are required: Form I-9, Employment Eligibility Verification, and Form W-4, Employee’s Withholding Certificate. Form I-9 verifies the employee’s identity and their legal authorization to work in the United States. Form W-4 allows employees to indicate their tax situation to their employer, which helps determine the correct amount of federal income tax to withhold from their wages. Many states also have their own equivalent forms to determine state income tax withholding, similar to the federal W-4.

Calculating gross pay involves determining the total earnings before any deductions. For hourly employees, this is typically the hourly rate multiplied by the hours worked. For salaried employees, it is their fixed salary amount for the pay period. From this gross pay, mandatory deductions and taxes must be withheld.

Federal income tax withholding is based on the information provided on the employee’s Form W-4 and the applicable IRS tax tables or wage bracket methods. Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare, are also mandatory deductions. For 2025, the Social Security tax rate is 6.2% for both the employee and the employer, applied to wages up to a certain annual limit ($176,100). The Medicare tax rate is 1.45% for both the employee and the employer, with no wage base limit.

State and local taxes, such as state income tax withholding and state unemployment insurance (SUI), are calculated based on state-specific rates and rules. Net pay is then determined by subtracting all these mandatory deductions and any voluntary deductions (like health insurance premiums) from the gross pay.

Paying Your Employee and Depositing Taxes

After calculating the gross pay, deductions, and net pay, the next practical step involves paying the employee and making timely tax deposits. Employers can pay employees through various methods, including direct deposit into a bank account or by issuing a physical check. Regardless of the payment method, providing a detailed pay stub is important, outlining the gross pay, all deductions, and the resulting net pay. This transparency helps the employee understand their earnings and withholdings.

Federal payroll taxes, including withheld federal income tax, Social Security, and Medicare taxes, must be deposited with the U.S. Treasury. The frequency of these federal tax deposits, whether monthly or semi-weekly, depends on the total tax liability reported on Form 941, Employer’s Quarterly Federal Tax Return. Most federal tax deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS). To use EFTPS, employers need to enroll online at EFTPS.gov or by phone, receiving a Personal Identification Number (PIN) in the mail within approximately five to seven business days. Once enrolled, payments can be scheduled online or by phone.

State tax deposits for income tax withholding and unemployment insurance also have specific schedules and methods, which vary by state. Many states utilize their own online portals or electronic funds transfer systems for these payments. Adhering to these deposit schedules is important to avoid penalties for late payments.

Filing Payroll Tax Returns

The final stage of payroll processing involves filing various federal and state payroll tax returns to report wages paid and taxes withheld and deposited. For federal taxes, employers generally file Form 941, Employer’s Quarterly Federal Tax Return, four times a year. This form reports wages paid, tips reported, federal income tax withheld, and both the employee and employer shares of Social Security and Medicare taxes. The due dates for Form 941 are April 30 (for Quarter 1: January-March), July 31 (for Quarter 2: April-June), October 31 (for Quarter 3: July-September), and January 31 of the following year (for Quarter 4: October-December).

Employers also typically file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, once a year to report FUTA tax liability. The due date for Form 940 is January 31 of the year following the tax year.

At the end of each calendar year, employers must prepare and distribute Form W-2, Wage and Tax Statement, to each employee by January 31 of the following year. This form details the employee’s annual wages and the amount of federal, state, and local taxes withheld. A copy of each W-2, along with Form W-3, Transmittal of Wage and Tax Statements, must be submitted to the Social Security Administration (SSA) by January 31. Form W-3 summarizes the total wages and taxes reported on all accompanying W-2 forms. States have their own corresponding quarterly and annual reconciliation forms for state income tax withholding and unemployment insurance, which vary by jurisdiction.