What Is the Best Way to Do Payroll for One Employee?

Managing payroll for a single employee requires adherence to regulations. Establishing a proper payroll system ensures legal compliance and accurate financial records. Understanding the various obligations, from tax withholding to reporting, is fundamental for any employer. A compliant payroll process protects the business from penalties and ensures correct, timely employee payments.

Initial Setup and Registration Requirements

Before an employer can begin processing payroll, several foundational steps and registrations are necessary. Obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) is a primary requirement, serving as a unique federal tax ID for the business. This nine-digit number is crucial for reporting taxes, opening business bank accounts, and other official purposes. Applying for an EIN is a straightforward process.

Beyond federal requirements, employers must register with relevant state agencies for state withholding taxes and state unemployment insurance. These registrations ensure the business can properly remit state income taxes withheld from an employee’s wages and contribute to the state’s unemployment insurance fund. The specific agencies and registration processes vary by state, but generally involve online applications or submitting forms to the state’s department of revenue or labor. Employers should confirm their state’s specific requirements to ensure full compliance.

New hire reporting is another important obligation, requiring employers to report newly hired employees to a designated state agency. This helps states enforce child support orders and detect unemployment insurance fraud. Employers typically have a short window, often within 20 days of the employee’s start date, to complete this report.

Collecting necessary employee information is also a preparatory step, including the completion of Form W-4, Employee’s Withholding Certificate, and Form I-9, Employment Eligibility Verification. Form W-4 helps employers determine the correct amount of federal income tax to withhold from an employee’s pay, based on the employee’s marital status and other adjustments. Form I-9 verifies an employee’s identity and authorization to work, requiring the employee to present specific documents like a passport or a driver’s license and Social Security card. Understanding worker’s compensation insurance requirements is also important, as most states mandate this coverage to provide benefits to employees injured on the job.

Deciding How to Process Payroll

Employers have several options for processing payroll, each with distinct advantages and considerations. One approach is manual payroll processing, which involves calculating wages, deductions, and taxes using spreadsheets and IRS tax publications. This method is the most cost-effective as it avoids service fees or software costs. However, it demands a thorough understanding of tax laws and calculations, increasing the risk of errors if not performed meticulously.

Another option is utilizing payroll software, which automates many of the complex calculations and compliance tasks. These software solutions can calculate gross pay, withholdings, and net pay, and often assist with tax form preparation. While more expensive than manual processing, payroll software reduces the likelihood of computational errors and saves time. Basic versions are readily available.

Engaging a payroll service provider represents the most comprehensive option, as these companies handle all aspects of payroll. Such services calculate wages and deductions, manage tax filings, and facilitate direct deposits to the employee’s bank account. This option offers convenience and minimizes the employer’s involvement in payroll tasks. The cost for these services is generally higher than software or manual processing, but it can be a worthwhile investment for employers seeking to minimize their administrative burden and ensure compliance.

Running Payroll and Making Payments

Once the initial setup is complete and a payroll processing method has been chosen, the regular process of running payroll involves specific steps for calculating pay, deducting taxes, and making payments. The first step is to calculate the employee’s gross pay, which is their total earnings before any deductions, based on their hourly rate or salary and hours worked. From gross pay, various deductions are then subtracted, including federal income tax, Social Security tax, Medicare tax, and any applicable state or local taxes. The remaining amount is the employee’s net pay.

After calculating net pay, the employer must pay the employee, which can be done through direct deposit into their bank account or by issuing a physical check. Direct deposit is preferred for its convenience and security. Simultaneously, the employer is responsible for remitting the withheld federal and state taxes to the appropriate government agencies.

Federal tax deposits, including withheld income tax, Social Security, and Medicare taxes, are made through the Electronic Federal Tax Payment System (EFTPS). The frequency of these deposits depends on the employer’s total tax liability. For most small businesses, deposits are made monthly by the 15th of the following month. State tax deposit requirements vary by state and depend on the amount of tax withheld, with payment methods often including online portals or electronic funds transfers.

Ongoing Reporting and Recordkeeping

After payroll has been processed and payments made, employers have ongoing reporting and recordkeeping responsibilities to maintain compliance. Quarterly federal tax forms, such as Form 941, Employer’s QUARTERLY Federal Tax Return, must be filed with the IRS. This form reports income taxes, Social Security tax, and Medicare tax withheld from employee wages, as well as the employer’s share of Social Security and Medicare taxes. The Form 941 is due by the last day of the month following the end of each calendar quarter.

Similarly, employers must file quarterly state tax forms, which include state unemployment insurance reports and state withholding tax reports. These forms ensure the state receives accurate information regarding wages paid and taxes collected. Due dates and forms vary by state, but they align with federal quarterly reporting periods.

Annual forms are also required, Form W-2, Wage and Tax Statement, for the employee and Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for the IRS. Form W-2 reports the employee’s annual wages and taxes withheld, and it must be provided to the employee and filed with the Social Security Administration by January 31st of the following year. Form 940 reports the federal unemployment tax liability and is due by January 31st. Maintaining accurate payroll records, including pay stubs, tax forms, and deposit records, is important for audit purposes and future reference.