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

Payroll for even a single employee involves a series of steps and obligations. Employers must adhere to federal and state regulations to ensure compliance. Payroll involves accurate tax withholding, timely filings, and meticulous record-keeping. Establishing a payroll process prevents penalties and ensures smooth financial operations.

Initial Setup for Payroll

Before processing any payments, an employer must complete several setup tasks. Employers must obtain an Employer Identification Number (EIN) from the IRS. This federal tax ID is essential for hiring employees, opening business bank accounts, and filing taxes. The EIN application can be completed online, by fax, or by mail using Form SS-4.

Employers also register with state agencies. This includes registering for state unemployment insurance and state income tax withholding. Agencies and processes vary by state, so employers must research their state’s requirements. This ensures proper reporting and remittance of state payroll taxes.

Collecting employee information is another step. The employee must complete IRS Form W-4, which provides details to calculate federal income tax withholding based on their marital status, dependents, and other adjustments. Similar state withholding forms may be required. Accurate information on these forms is vital for correct tax calculations.

Establishing a dedicated bank account for payroll is recommended. This separates payroll funds from other business expenses, improving financial organization and cash flow management. A separate account simplifies bookkeeping, tracks payroll transactions, and ensures funds are available for timely salary disbursements.

Choosing a Payroll Processing Method

Selecting the right payroll processing method is an important decision, impacting the ease and accuracy of payroll. Three common approaches are manual processing, payroll software, and a full-service payroll provider. Each offers advantages and considerations regarding time, cost, and compliance.

Manual payroll involves calculating wages, taxes, and deductions by hand or using spreadsheets. This method appears cost-effective as it avoids software subscriptions or service fees. However, it demands understanding federal and state tax laws, including FICA taxes, federal income tax withholding, and state unemployment taxes. The risk of errors is higher, potentially leading to penalties.

Payroll software offers an automated solution with features like automated tax calculations, direct deposit, and assistance with tax filings. Many options are designed for small businesses and are cost-effective, often priced per employee or with a base fee plus a per-employee charge ($20-$50 per month). While software reduces errors and helps compliance, the employer remains responsible for accurate data entry, understanding its functions, and providing necessary information.

A full-service payroll provider is the most hands-off approach. These providers handle all payroll aspects, including calculating wages, withholding taxes, managing direct deposits, and filing federal and state payroll tax forms. They also provide year-end tax document preparation. This option offers high compliance and convenience, as the provider stays current with tax laws and deadlines. While typically the most expensive ($50-$100 per month for a single employee), the cost is justified by time saved and reduced non-compliance risk.

Core Payroll Processing Steps

Once initial setup is complete and a processing method is chosen, running payroll begins for each pay period. This involves several steps to calculate the employee’s take-home pay. The first step is determining gross pay, the total earnings before any deductions. For hourly employees, this means multiplying their hourly rate by the number of hours worked, including any overtime. For salaried employees, gross pay is their annual salary divided by the number of pay periods in a year.

Following gross pay calculation, pre-tax deductions are subtracted. These deductions reduce the employee’s taxable income, lowering their federal and often state income tax liability. Common examples include contributions to a 401(k) retirement plan, health insurance premiums, or health savings account (HSA) contributions. The specific types of pre-tax deductions depend on the benefits offered by the employer and elected by the employee.

Next, federal and state income taxes are withheld from the remaining taxable wages. The amount of federal income tax withheld depends on the information provided by the employee on Form W-4, including their filing status and any adjustments. State income tax withholding calculations vary by state, often following a similar structure to federal withholding but with different rates and rules.

FICA taxes (Social Security and Medicare) are also withheld. For 2025, the Social Security tax rate is 6.2% on wages up to an annual limit of $176,100, while the Medicare tax rate is 1.45% on all wages. Employers must withhold these amounts from the employee’s pay and contribute a matching amount. Post-tax deductions, such as Roth IRA contributions or wage garnishments, are then subtracted. The final amount after all deductions is the employee’s net pay, issued through direct deposit or check.

Required Payroll Filings and Year-End Tasks

Beyond regular pay period processing, employers have obligations for reporting and remitting payroll taxes to federal and state authorities. These tasks are distinct from per-pay-period calculations but are equally important for compliance. Federal reporting primarily involves Forms 941, 944, 940, and W-2.

Most employers file Form 941 to report federal income tax withheld and both employer and employee shares of Social Security and Medicare taxes. This form is filed quarterly, with due dates typically April 30, July 31, October 31, and January 31 of the following year. Some small employers (annual employment tax liability of $1,000 or less) may file Form 944 instead of Form 941. Form 944 reports the same taxes annually, due by January 31 of the following year.

Employers must also file Form 940 to report federal unemployment taxes. This tax, paid solely by the employer, funds unemployment compensation programs. Form 940 is due annually by January 31 of the succeeding year. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee, though employers typically receive a credit for timely payment of state unemployment taxes, reducing the effective federal rate.

At the end of the year, employers are required to issue Form W-2, Wage and Tax Statement, to each employee. This document reports the employee’s annual wages, tips, and other compensation, along with federal, state, and local taxes withheld. Employers must furnish Form W-2 to employees by January 31 of the following year and also submit copies to the Social Security Administration (SSA). State unemployment and withholding tax filings similarly have their own periodic deadlines and reporting forms, which vary by state. These year-end tasks ensure that employees have the necessary information for their personal tax returns and that all employment taxes are properly reported to the relevant authorities.