How to Set Up Payroll for One Employee

Setting up payroll for a single employee involves navigating specific legal and tax requirements. Even with one employee, an employer assumes various responsibilities, including accurate wage calculation, tax withholding, and timely reporting to government agencies. Establishing these processes correctly from the outset helps ensure compliance and avoids potential penalties.

Employer Identification and Registration

Before processing any payroll, an employer must secure an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). An EIN functions as a federal tax ID and is required for tax filings, opening business bank accounts, and hiring employees. Obtaining an EIN online through the IRS website is the fastest method, providing immediate issuance during operational hours. Employers can also apply by fax using Form SS-4, or by mail. The application requires details such as the business’s legal name, address, entity type, and the responsible party’s taxpayer identification number.

Beyond federal registration, employers also need to register with relevant state tax agencies. This includes the state’s unemployment insurance agency for State Unemployment Tax Act (SUTA) purposes and the state’s revenue or tax department for state income tax withholding, if applicable. These state registrations will result in the issuance of a state tax ID number, which is necessary for reporting and remitting state-specific payroll taxes. Employers must consult their specific state’s guidelines as processes vary by jurisdiction.

Employers are also federally mandated to report new hires to state agencies. This requirement helps enforce child support obligations and prevent fraud in programs like unemployment insurance. Employers generally must report new employees within 20 days of their hire date, though some states may require earlier notification. The report includes the employer’s name, address, Federal Employer Identification Number (FEIN), and the employee’s name, address, and Social Security number.

Collecting Employee Details

Before an employee’s first payday, collecting specific information and forms is essential for accurate payroll processing and compliance. The Form W-4, Employee’s Withholding Certificate, is a document that the employee completes to inform the employer how much federal income tax to withhold from their wages. This form guides the employer in calculating federal income tax withholding based on the employee’s filing status, income, and any claimed credits or deductions. Employers should use the information provided on the W-4 in conjunction with IRS Publication 15-T to determine the correct withholding amount.

Another mandatory document is Form I-9, Employment Eligibility Verification, which verifies the employee’s identity and eligibility to work in the United States. Employers must complete Section 2 of Form I-9 within three business days of the employee’s first day of work. This involves examining original documents presented by the employee that establish identity and work authorization, ensuring they appear genuine and relate to the individual. Employers must retain Form I-9 for a specified period and make it available for inspection upon request.

Beyond these forms, employers must collect other essential employee details. These include the employee’s full legal name, current address, and Social Security number. If direct deposit is offered and elected by the employee, their bank account information, including routing and account numbers, must also be securely collected.

Calculating Pay and Withholding Taxes

Determining an employee’s gross and net pay involves several calculations. Gross pay is the total compensation earned before any deductions, calculated based on an hourly wage multiplied by hours worked, or a fixed salary. If applicable, overtime hours, paid at one-and-a-half times the regular rate for hours exceeding 40 in a workweek, are added to the regular earnings.

Federal income tax withholding is calculated using the information from the employee’s Form W-4 and the methods provided by the IRS in Publication 15-T. The amount withheld depends on factors like the employee’s filing status, claimed dependents, and any additional income or deductions specified on their W-4.

Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare, are withheld from employee wages, and employers must match these contributions. 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. Any earnings above this limit are not subject to Social Security tax. The Medicare tax rate is 1.45% for both the employee and the employer, applied to all wages without a wage base limit. Employees earning above a certain threshold are subject to an additional 0.9% Medicare tax, though employers do not match this additional amount.

The Federal Unemployment Tax Act (FUTA) imposes a tax on employers to fund federal unemployment benefits. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. Employers receive a credit of up to 5.4% for timely paid state unemployment taxes, effectively reducing the FUTA rate to 0.6% in most cases. This is solely an employer-paid tax and is not withheld from employee wages.

State income tax withholding requirements vary by state, and employers must consult their specific state’s tax department for applicable rates and withholding tables. State Unemployment Insurance (SUI) is an employer-paid tax, with rates determined by each state and often influenced by an employer’s claims history. After all federal and state withholdings and deductions are accounted for, the remaining amount is the employee’s net pay. Employers are required to provide a pay stub with each payment, detailing gross pay, all deductions, and net pay.

Reporting and Paying Payroll Taxes

After calculating payroll and taxes, employers must accurately report and remit these funds to the appropriate federal and state authorities. Federal income tax withheld and FICA taxes (both employee and employer shares) are deposited with the IRS using the Electronic Federal Tax Payment System (EFTPS). Most employers follow either a monthly or semi-weekly deposit schedule, determined by the total tax liability incurred during a lookback period. Monthly depositors remit taxes by the 15th of the following month, while semi-weekly depositors have specific deadlines based on their payday.

Employers report wages paid and taxes withheld quarterly using Form 941, Employer’s Quarterly Federal Tax Return. This form summarizes the federal income tax, Social Security tax, and Medicare tax liabilities for the quarter. For very small employers with an annual tax liability of $1,000 or less, the IRS may permit filing Form 944, Employer’s Annual Federal Tax Return, instead of quarterly Form 941. However, the IRS plans to discontinue Form 944 after the 2025 calendar year, requiring all employers to file Form 941 starting in 2026.

The annual Federal Unemployment Tax (FUTA) is reported on Form 940, Employer’s Annual Federal Unemployment Tax Return. This form is due by January 31 of the year following the tax year. FUTA tax deposits are required quarterly if the cumulative liability exceeds $500, and these payments are also made via EFTPS.

Finally, employers must issue Wage and Tax Statements (Form W-2) to each employee by January 31 of the following year. Copies of Form W-2, along with Form W-3, Transmittal of Wage and Tax Statements, must also be filed with the Social Security Administration (SSA) by the same January 31 deadline. State tax payments and filings often mirror federal requirements, necessitating separate payments and returns for state income tax withholding and state unemployment insurance, adhering to state-specific deadlines and forms.