How to Set Up Payroll for One Employee

Setting up payroll for an employee involves navigating various legal and tax obligations, even when managing compensation for a single individual. Establishing a compliant payroll system from the outset ensures adherence to federal, state, and local regulations. This foundational work prevents potential penalties and maintains accurate financial records for both the business and the employee. Understanding these requirements is a fundamental step for any entity bringing on its first team member.

Essential Employer Registrations

Before an employer can process payroll, it is necessary to complete specific registrations with government agencies. A primary step involves obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS), which acts as a federal tax ID for businesses and is required for reporting taxes. Employers can apply for an EIN online through the IRS website, often receiving the number immediately. Other methods, like faxing or mailing Form SS-4, take longer.

Beyond the federal EIN, employers must also register with relevant state tax agencies for state income tax withholding and state unemployment insurance (SUI) programs. State unemployment insurance is funded by employer contributions and provides benefits to eligible workers who have lost their jobs. Similarly, some local jurisdictions may impose their own payroll taxes, necessitating additional registration with local tax authorities. Completing these registrations is essential for compliant operation.

Gathering Employee Information

Once employer registrations are complete, collecting specific information from the new employee is the next step before processing payroll. Every new employee must complete Form W-4, Employee’s Withholding Certificate, which provides details for federal income tax withholding. The employee indicates their tax situation on this form, including marital status and any additional withholding amounts, to ensure accurate federal income tax calculations.

Another mandatory document is Form I-9, Employment Eligibility Verification, used to verify an employee’s identity and legal authorization to work in the United States. Employers must examine acceptable documents and retain this form for each new hire. Employers are also typically required to report new hires to their state’s new hire directory, often within 20 days, to help child support enforcement agencies. Basic employee data, including full legal name, current address, Social Security number, and contact information, must also be accurately collected and maintained for payroll and compliance purposes.

Calculating Payroll and Deductions

After gathering employee information, the next phase involves calculating an employee’s gross pay and applying necessary deductions to arrive at their net pay. Gross pay is the total compensation earned before any deductions, determined by whether the employee is paid hourly or on a salary basis. From this gross amount, various deductions are made, categorized as either pre-tax or post-tax.

Pre-tax deductions reduce an employee’s taxable income before taxes are calculated, which can lower their overall tax burden. Common examples include contributions to traditional 401(k) retirement plans and health insurance premiums, if offered by the employer. Federal income tax withholding is then calculated based on Form W-4 information and IRS tax tables. This withholding adheres to the progressive taxation system, meaning higher earners generally pay a larger percentage of their income in taxes.

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 an annual wage base limit of $176,100. The Medicare tax rate is 1.45% for both employee and employer, with no wage base limit.

State and local income tax withholdings, if applicable, are then calculated based on the specific rules of the relevant jurisdiction. Finally, post-tax deductions, which do not reduce taxable income, are applied, including court-ordered wage garnishments, Roth 401(k) contributions, or certain insurance premiums. The amount remaining after all these deductions is the employee’s net pay.

Reporting and Remitting Payroll Taxes

Once payroll calculations are complete, employers must fulfill their obligations to report and remit the withheld taxes to the appropriate government agencies. For federal taxes, employers typically file Form 941, Employer’s Quarterly Federal Tax Return, four times a year. This form reports the total wages paid, tips reported, federal income tax withheld, and both the employee’s and employer’s shares of Social Security and Medicare taxes for the quarter. Quarterly filing deadlines are generally April 30, July 31, October 31, and January 31 of the following year.

Employers also annually file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to report their federal unemployment tax liability. This tax is paid entirely by the employer and contributes to the federal unemployment compensation program. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee, though employers can often receive a credit that reduces this rate if they pay their state unemployment taxes on time. The due date for Form 940 is January 31 of the following year.

At the end of each calendar year, employers must prepare Forms W-2, Wage and Tax Statement, for each employee. These forms report the employee’s annual wages and the federal, state, and local taxes withheld. Employers must furnish Copy B, C, and 2 of Form W-2 to employees by January 31 of the following year. Form W-3, Transmittal of Wage and Tax Statements, serves as a summary for all W-2s and is submitted to the Social Security Administration (SSA) with Copy A of the W-2s. This submission to the SSA is also due by January 31.

Federal tax deposits, including withheld income tax and FICA taxes, are typically remitted electronically through the Electronic Federal Tax Payment System (EFTPS). This free service allows employers to schedule payments up to 365 days in advance. Additionally, employers have similar quarterly or annual reporting and payment obligations for state and local payroll taxes, which vary by jurisdiction. Finally, paying the employee can be accomplished through various methods, such as direct deposit into their bank account or issuing a physical check.