How to Set Up Payroll for 1 Employee

Payroll for a single employee involves legal and financial obligations beyond just issuing a paycheck. Understanding these requirements is essential for any employer, even with one team member. This process includes initial registration with government agencies, ongoing tax calculations, and reporting. Correct payroll management helps businesses avoid penalties and fosters a transparent relationship with their employee.

Employer Registration and Setup

Before processing payroll, employers must complete several federal and state registrations. A Federal Employer Identification Number (EIN) is a unique tax ID assigned by the IRS. It is required for businesses that hire employees or file federal taxes. Obtaining an EIN is a straightforward process, typically completed online through the IRS website.

Employers must also register with their state for specific tax accounts. These commonly include an unemployment insurance (UI) account and a state income tax withholding account. Registration processes vary by state, with most offering online portals. Some states may require registration as soon as covered wages are paid.

Some localities may require their own payroll-related registrations, especially for local income taxes. These involve registering the business and withholding a percentage of employee wages. Employers should consult local tax authorities for specific instructions, as requirements vary.

Gathering Employee Information

Accurate payroll processing requires collecting comprehensive information from the employee before their first paycheck. A crucial federal document is Form W-4, Employee’s Withholding Certificate. The employee completes this form to inform the employer how much federal income tax to withhold from their wages. Employers use this information to calculate the appropriate withholding amount.

Another mandatory federal form is Form I-9, Employment Eligibility Verification. This form confirms an employee’s identity and legal authorization to work in the United States. The employee completes Section 1 by their first day of employment. The employer must complete Section 2 within three business days, reviewing documents that prove identity and work authorization. Employers must retain completed Form I-9s for a specific period.

Beyond these federal forms, employers need to collect personal details vital for payroll. These include the employee’s full legal name, current address, and Social Security number. Bank account information is also necessary if the employer plans to offer direct deposit, a common and convenient method for paying wages. Maintaining the confidentiality and security of this sensitive employee data is important.

Calculating and Withholding Payroll

Calculating gross pay is the initial step in payroll, determined by whether an employee is paid hourly or a fixed salary. For hourly employees, gross pay is calculated by multiplying the hourly wage by the number of hours worked, with overtime hours typically paid at a higher rate, such as time and a half, for hours exceeding 40 in a workweek. Salaried employees receive a predetermined amount per pay period.

After gross pay is determined, employers must withhold various taxes. Federal income tax withholding is calculated based on the employee’s Form W-4 and the IRS’s tax withholding tables. This ensures that federal income tax is regularly remitted throughout the year.

FICA taxes, comprising Social Security and Medicare taxes, are mandatory withholdings that fund retirement, disability, and healthcare benefits. Both the employee and employer contribute to Social Security and Medicare taxes. For Social Security, both contribute 6.2% of wages up to an annual wage base limit. For Medicare, both contribute 1.45% of all wages. An Additional Medicare Tax of 0.9% may apply to an employee’s wages exceeding a certain threshold.

State income tax withholding varies significantly, as some states do not levy a state income tax, while others have flat rates or progressive tax structures. Employers in states with income tax must consult state-specific tax tables and guidelines to determine the correct withholding amount. Similarly, some local jurisdictions may also require withholding for local income taxes.

Employers are responsible for specific payroll taxes not withheld from the employee’s pay. The Federal Unemployment Tax Act (FUTA) requires employers to pay a tax that funds unemployment benefits, typically a rate of 6.0% on the first $7,000 of each employee’s wages. State Unemployment Tax Act (SUTA) taxes are paid by employers to fund state unemployment insurance programs. Rates and wage bases for SUTA vary by state and are often adjusted based on an employer’s claims history.

Other deductions may also impact an employee’s net pay. Pre-tax deductions, such as contributions to a 401(k) retirement plan or health insurance premiums, are subtracted from gross pay before income taxes are calculated, thus reducing the employee’s taxable income. Post-tax deductions, like wage garnishments or union dues, are taken out after taxes have been calculated and withheld.

Paying Employees and Tax Agencies

Once payroll calculations are complete, employers must promptly pay their employee and deposit the withheld taxes with the appropriate government agencies. For paying the employee, direct deposit is a widely used method, requiring the employee’s bank name, account number, and routing number, which are typically collected during the onboarding process. Alternatively, paper checks remain an option, requiring secure printing and distribution.

Federal tax deposits, which include withheld federal income taxes and both employee and employer portions of FICA taxes, must be remitted to the IRS. The frequency of these deposits, either monthly or semi-weekly, depends on the employer’s total tax liability from a lookback period. Most employers use the Electronic Federal Tax Payment System (EFTPS), a free service provided by the U.S. Department of the Treasury, to make these deposits electronically.

State and local tax deposit schedules and methods vary depending on the jurisdiction. Employers typically need to register with each relevant state or local tax agency, which then provides specific instructions on how and when to remit withheld state income taxes, state unemployment taxes, and any local taxes. These agencies often provide online portals or electronic payment options for convenience and compliance.

Required Payroll Reporting and Record Keeping

Beyond regular payments and deposits, employers have ongoing reporting obligations to various tax authorities. The Quarterly Federal Tax Return, Form 941, is filed with the IRS to report wages paid, tips received, and federal income, Social Security, and Medicare taxes withheld from employee wages, along with the employer’s share of FICA taxes. This form is due by the last day of the month following the end of each calendar quarter (April 30, July 31, October 31, and January 31).

At the end of each calendar year, employers must prepare and issue Form W-2, Wage and Tax Statement, to each employee and submit copies to the Social Security Administration (SSA). This form reports the employee’s annual wages and the amount of federal, state, and local taxes withheld. Form W-2s must be provided to employees by January 31 of the following year and submitted to the SSA by the same deadline.

The Annual Federal Unemployment Tax Act (FUTA) Return, Form 940, is filed with the IRS to report the federal unemployment tax liability for the year. This form is due by January 31 of the following year, though employers may have to make quarterly FUTA deposits if their liability exceeds a certain threshold.

States and some localities have their own specific quarterly and annual reporting requirements for unemployment insurance and income taxes. These often involve filing summary reports that reconcile wages paid and taxes remitted throughout the year, similar to federal forms. Employers should consult their respective state and local tax agencies for detailed filing instructions and deadlines.

Maintaining accurate and detailed payroll records is a non-negotiable requirement for employers. These records include time sheets, pay stubs, tax forms, deposit confirmations, and any other documentation related to employee compensation and tax remittances. The IRS generally requires employers to keep all employment tax records for at least four years after the date the tax becomes due or is paid, whichever is later. State and local laws may have their own record retention requirements, sometimes extending beyond federal guidelines.