How to Do Payroll for One Employee: Simple Guide for 2025

Fewer employees won’t minimize the essential steps related to tax obligations, legal requirements, and employee satisfaction. Nor will it reduce how daunting many small business owners find the payroll process.

If you are new to payroll or want to learn how to handle payroll for one employee; if you’re a small business owner, startup founder or HR staff, keep reading. Whether you're considering manual payroll or automated services, this guide offers information on simple payroll for small business from setup to processing payroll.

Why Payroll Matters for One Employee

Payroll is more than just paying your employee. It involves calculating wages and taking out taxes. It also includes keeping records. These tasks help follow the law and build trust with your employee.

For a small business with one employee, understanding payroll basics is crucial. It helps you meet legal obligations while satisfying your employee's payment expectations. The payroll process typically involves seven steps:

1. Collect employer information.

2. Gather employee information.

3. Understand tax obligations.

4. Choose a payroll schedule.

5. Calculate payroll.

6. File and pay payroll taxes.

7. Maintain payroll records.

Good payroll management is important for all businesses, small or large. Even a minor mistake can cause significant issues. Payroll management issues can lead to:

• Financial penalties

• Unhappy employees

• Missed opportunities.

• Damaged business reputation

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Legal compliance is a primary reason to manage payroll effectively. Federal, state, and in some cases, local laws include requirements on proper tax withholding, accurate reporting, and timely payments, among others. Poor payroll management may result in financial penalties. For a small business, these penalties can be potentially devastating.

Employees expect their employers to pay them on time and accurately. An efficient payroll process contributes to employee satisfaction and retention.

Keeping accurate records helps with financial planning and decision making. It alsdecision-makingo provides clear proof of expenses if the IRS audits your business.

Good payroll practices also support efficient business operations and can enhance your reputation as a reliable employer.

Overall, effective payroll management is more than just number crunching. Taking care of your business's finances and building employee confidence is important. This is true even if you plan to handle payroll for just one employee.

7 Steps to Set Up Payroll for One Employee

Setting up payroll services for one employee involves steps like calculating wages, deducting taxes, and maintaining records. These essential tasks help support legal compliance, strengthen employee trust, and help protect the reputation of your small business.

Here are some of the key steps in processing payroll for one employee.

Step 1: Gather Employer Information

To set up payroll, start by gathering essential employer information. This first step helps support smooth payroll processing and compliance adherence. Required employer information includes:

• Legal entity documentation

• Employer Identification Number (EIN)

• State tax registration.

• Local permits and licenses

• Business bank account

• Employment laws

• Beneficial Ownership Reporting

Legal Entity Documentation

If you are a new small business owner, you need to register your business. This could be an LLC, partnership, corporation, or tax-exempt organization. Make sure to do this with your state. You need legal entity documentation to apply for your Employee Identification Number (EIN), also known as a Federal Employee Identification Number (FEIN).

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Employer Identification Number (EIN)

Any U.S. business with employees needs an EIN. This nine-digit number helps a business operate legally in the United States.

A business needs an EIN to open a business bank account, engage workers, and obtain loans. You must also file taxes and obtain business licenses and permits. Getting an EIN through the IRS is easy and free.

State Tax Registration

Register for state tax accounts, required for withholding state income taxes. Learn more about payroll and state taxes in your state.

Local Permits & Licenses

Small businesses may need one or more local permits or licenses to operate. This depends on state and local rules, as well as the type of business activities. Types of state and local licenses and permits include a business license, sales tax permit, and resale permit. They also include a doing business as (DBA) license, professional licenses, and building-related permits.

Business Bank Account

A business bank account lends credibility and professionalism to your business. It also makes tax preparation easier. It keeps business and personal expenses separate.

Plus, it gives you options for additional banking services. These services include wire transfers, online bill payments, automated payroll, business loans, and business credit cards. 

Employment Laws

If you’re not an employment law expert, it’s important to add one to your professional services team. It is equally important to familiarize yourself with employment laws, including the Fair Labor Standards Act (FLSA) and those under state and local law. FSLA governs minimum wage, overtime, and other employee rights; compliance is critical.

Beneficial Ownership Reporting

You may need to report some information about your beneficial owners. This depends on varied factors and pending court decisions. This information will be reported to the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN).

In December 2024, a federal district court temporarily halted beneficial ownership information reporting requirements. However, the Supreme Court was requested to lift the injunction, which would reinstate reporting requirements and deadlines while the overarching argument surrounding the constitutionality of the rule is ironed out in a federal appeals court—scheduled for March 2025.  

As of January 16, 2025, the U.S. Supreme Court has yet to approve or deny the government’s request to lift the injunction. Businesses should stay up to date on this topic as requirements could be reinstated in the coming days or weeks and they may be required to report information to FinCEN quickly.

Step 2: Collect Employee Information

Collecting and properly documenting employee information is a critical step in paying your employee efficiently and on time. Key employee information includes:

• Completed W-4 Form

• Verified Form I-9

• Paycheck preferences

• Additional deductions

• Wage garnishment

W-4 Completion

One of the first steps to onboard a new employee is to have them fill out a W-4 form. People also call this form the Employee’s Withholding Certificate. It informs the employer about the amount of tax to deduct from an employee’s paycheck. Each employee determines the withholding amount by filling in their personal details.

I-9 Verification

Form I-9 confirms an employee's legal right to work in the United States. Both the employee and employer must complete the form, and the law requires the employer to keep the completed form on file. Some online payroll services include new hire reporting as part of its small business plans.

Payroll Preferences

Depending on applicable legal requirements, some small businesses may offer employees the choice between direct deposit or a printed check. Once you verify your new employee, document their payroll preference. If your employee opts for direct deposit, document that and collect their bank account details securely.

Additional Deductions

When calculating payroll, you must consider federal, state, and local taxes. You may also need to include deductions for health insurance and retirement planning.

Wage Garnishment

An employer may have to hold back employee pay if a court orders it. This can happen for debts like spousal or child support. Wage garnishment continues until the employee pays off the debit or makes other payment arrangements.

Step 3: Understand Tax Obligations

Small business owners who understand their federal, state, and local tax duties can make better financial choices. Good planning can help you have enough money to pay your taxes. This can help you avoid expensive penalties and interest fees. Consulting with a local tax professional can help small business owners navigate this tricky area.

Payroll Taxes

As an employer, you are responsible for withholding, depositing and reporting employment taxes, including: 

• Federal income tax

• State income tax and local income taxes, where applicable 

• Employees' share of Social Security and Medicare taxes (called FICA)

For each employee, you must also pay and report the employers' share of:

• Social Security (part of FICA), a flat 6.2% based on employee pay and applies up to a certain wage limit for each worker.

• Medicare (part of FICA), 1.45% of all compensation subject to the tax for each employee

• Federal unemployment taxes (FUTA), which is capped at the first $7,000 in wages paid to each employee.

• State unemployment taxes, also known as state unemployment insurance (SUI). SUI tax rate ranges and unemployment tax wage bases vary by state and industry. 

Failure to properly withhold and deposit these taxes can result in significant penalties. 

Automating payroll, tax calculations and payments with a payroll service like SurePayroll® By Paychex  

can help small business owners save time and simplify payroll and payroll tax management. 

‍Self-Employment Taxes

Self-employed people must file an annual income tax return. They also need to pay estimated taxes every quarter, according to the IRS. 

Self-employed individuals handle taxes for Social Security and Medicare differently. In a standard employer-employee setup, the business and the worker share these taxes. 

When you’re self-employed, you must cover both the employer and employee portion. Self-employment tax totals 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. Net earnings from self-employment drive the calculation. 

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Step 4: Choose a Payroll Schedule

A one-size-fits-all approach to setting pay periods for a small business does not exist. No matter if you have one employee or many, you must follow tax and employment laws. You also need to meet payroll obligations on time. The first step is selecting the best pay schedule for your business.

So, what is the best payroll period for paying employees? Short answer: The one that works for you.

Weekly Pay Periods

A weekly pay period means employees get paid once a week on a designated date, such as every Friday. This can offer employees a steady cash flow. But it can be costly and demanding for you.

A weekly payday means you need to process payroll every week. This includes making sure tax withholdings are correct and managing benefits. You will do this 52 times a year.

Biweekly Pay Periods

Employees on a biweekly pay schedule receive their pay every two weeks. This means they receive 26 paychecks each year, and sometimes 27.

A biweekly payroll also means employees will receive three paychecks in some months. Employees might like getting an “extra” check some months. However, biweekly pay periods can make it harder for you to track and plan cash flow compared to less frequent pay periods.

‍Semimonthly Pay Periods

A semimonthly pay period means employees get paid twice a month—or 24 paydays a year. On this schedule, the company pays employees on the same dates each month, such as the 1st and 15th. If one or both of those dates fall on a weekend, the pay date is typically the Friday before.

If you pay salaried employees, this schedule is easy to follow. You’ll run payroll on the same dates each month. The check amounts are usually the same for each pay period.

This pay period also reduces how long you’ll need to spend on payroll tax and benefit administration tasks. These pay periods can make it harder to pay hourly and other nonexempt employees. Semimonthly pay periods do not match up well with workweeks.

Monthly Pay Periods

For a monthly pay period, employees receive one paycheck per month, usually issued on the first or last day of the month. On this schedule, you will process 12 payrolls per calendar year. Running payroll monthly can potentially save you time, money, and resources.

It does, however, present challenges if you have hourly or other nonexempt employees. Many states do not allow a monthly pay schedule for nonexempt workers. Employees also may find it tougher to manage their personal finances on a monthly pay schedule. Monthly pay frequency is the least common pay period according to the U.S. Bureau of Labor Statistics.

Step 5: Calculate Payroll

When you hire an employee, you must pay them for their work and withhold the related  payroll taxes each pay period. 

Running payroll is complex. It requires collecting important tax forms and tracking employee hours, including overtime, vacation time, and sick time. You need to calculate employee pay and distribute paychecks. You are also responsible for calculating, filing, and paying employee and employer taxes. 

Understanding key terms is helpful for calculating payroll.

Common Payroll Terms

• Gross Pay. The income an employee earns before taxes, benefits, and other payroll deductions.

• Payroll Taxes. The taxes taken from employee paychecks can include federal, state, and local income tax withholding. This includes Social Security (also called Old Age, Survivors and Disability Insurance or OASDI) and Medicare. Employers may also handle paying FUTA (Federal Unemployment Tax Act) and SUI (State Unemployment Insurance).

• Payroll Deductions. Employees can have some amounts taken from their paychecks. These deductions can be voluntary or involuntary and include benefits like 401(k) retirement plans and health insurance. This may also include wage garnishment for items like child support and alimony.

• Net Pay. Wages less all deductions and taxes. 

Following you’ll find the main steps to run payroll. Or you can choose a payroll service for small business like SurePayroll® By Paychex to help you automate this important task.

Calculate Payroll

The steps to run payroll for one employee depend on industry rules and state or local laws.

Generally, you will start by calculating your employee’s gross pay. Gross pay is the income an employee earns before payroll tax and other deductions. Three steps to help you determine gross pay include:

1. Identify pay structure (hourly, salaried, etc.)

2. Calculate base pay (weekly salary, hourly rate times hours worked, etc.)

3. Include additional compensation (bonuses or commissions)

Use our free online payroll calculator to help simplify the complex calculations required to determine an employee’s hourly pay.  

Mandatory Tax Deductions and Other Deductions

After calculating gross pay, the next step is determining deductions. After calculating the taxes and deductions from each employee’s gross pay, you will pay them the remaining amount. This is their net pay, which people often call take-home pay.

Other deductions may be voluntary yet important. Agreeing upon these deductions with your employee in advance is vital. Accurate deduction handling is key to a successful payroll process.

•        Mandatory deductions include federal taxes, Social Security and Medicare

•        State and local taxes, as applicable

•        Voluntary deductions include health insurance and retirement

Finally, you’ll pay employees based on the method they selected, such as direct deposit, paper check or pay card, in line with applicable legal requirements.

‍Step 6: File and Pay Payroll Taxes

Next, you must file the payroll taxes with the proper tax agencies. When you file, use the right forms. This helps you report withholding activities to the correct federal, state, and local tax authorities. 

• Form 940 to report your annual Federal Unemployment Tax (FUTA) liability.

• Form 941 is the employer's quarterly federal tax return. It reports income taxes and Social Security and Medicare withheld from employees' paychecks. You also use this form to pay the employer’s portion of Social Security or Medicare. 

• If your yearly taxes for Social Security, Medicare, and federal income tax are $1,000 or less, use Form 944. You can pay these taxes once a year. 

You must deposit federal employment taxes electronically through the IRS Electronic Federal Tax Payment System (EFTPS). Check with your state to determine how to report and deposit state employment taxes. 

Run payroll from your mobile device. Anytime, anywhere.

Step 7: Maintain Payroll Records

Accurate payroll records can help ensure compliance with legal requirements. Proper documentation can also assist with any disputes with tax authorities.

For businesses, organized records are crucial during audits. They can provide evidence of compliance with labor and tax laws. This documentation can help to protect the business from potential fines.

Accurate records also help in employee management. They maintain clear records of employee hours, payments made, and any deductions. This transparency helps resolve any payroll discrepancies quickly.

Records are also vital when preparing annual tax documents. They simplify the process of generating W-2 forms. They also ensure that tax filings are correct, minimizing the risk of errors.

Here are key records to maintain:

• Employee tax forms (W-4)

• New employee employment authorization (I-9)

• Detailed payroll reports (hours, pay rates)

• Tax payment receipts.

• Employee pay stubs

Consistent record keeping also helps analyze business costs. Regular review of payroll data can reveal trends in labor costs. This insight allows for more informed financial planning.

Maintaining accurate records fosters trust with employees. It reassures them that someone handles pay and tax correctly, contributing to a positive work environment.

Tools and Services for Single Employee Payroll

When managing payroll for one employee, deciding between a manual or an automated system is Important. Each method has its own benefits and drawbacks depending on your business needs.

A manual payroll system involves calculating pay and tax withholdings by hand or using spreadsheets. This approach is low-cost and gives you direct control over every detail. However, manual calculations can be time-consuming and more prone to errors.

Alternatively, automated payroll systems streamline the process significantly. These systems handle calculations, tax filings, and record keeping automatically. The ease of use and accuracy make them attractive even for a business with only one employee. Here's a quick comparison:

Manual Payroll Systems

• Cost-effective with little to no upfront costs

• Offers greater control over data.

• Higher risk of human error

• Time-intensive process

Automated Payroll Systems

• Reduced errors through automated calculations

• Time-saving and efficient

• Often involves a monthly fee.

• Easier compliance with tax regulations

Automation stands out for its efficiency and reliability. Yet, the decision comes down to the complexity of your payroll needs and available resources. If accuracy and time management are priorities, an automated system is likely the best choice.

Online Payroll Services for One Employee

Opting for payroll services can offer peace of mind. These services manage payroll tasks, ensuring compliance and accuracy while you focus on your core business activities. Even with a single employee, the benefits of using payroll services are notable.

One key advantage is the insight that payroll services bring. They keep up with the latest tax laws and regulations, helping you to reduce the risk of costly mistakes. This expertise can save you substantial time and stress, especially during tax season.

Additionally, payroll services can handle diverse payroll tasks. These include calculating wages, deducting taxes, and preparing necessary forms. This expansive approach minimizes your administrative burden significantly. Here are the main benefits of using a payroll service like SurePayroll:

• Knowledgeable. Helps you comply with the latest payroll laws and regulations.

• Efficient. Handles complex payroll tasks, freeing up your time for other priorities.

• Cost Savings. Reduces the potential for penalties from errors or non-compliance.

• Scalable. SurePayroll is a company that offers automated payroll, tax management, HR, and benefits solutions. It helps small businesses save time and money, whether they are just starting or growing.

For businesses with limited time or expertise, payroll services are invaluable. They simplify a complex process, allowing you to maintain focus on growing your business. Whether you expand to more employees or stay small, these services adapt to fit your evolving needs.

Many small business owners find the cost for payroll services well worth it.

Compliance and Legal Considerations

Compliance with tax regulations and employment laws is non-negotiable in payroll management. Non-compliance can result in significant penalties and harm to business reputation.

First, familiarize yourself with federal tax obligations. This includes understanding income tax withholding, Social Security contributions, and Medicare taxes.

Next, stay informed about state and local tax requirements. Each location may have distinct obligations, which are crucial for accurate payroll processing. Use official sources, such as the IRS website, to stay updated on changes in tax laws. This ensures that withholding amounts are correct and timely.

Tax software can ease compliance, offering automatic calculation and form submissions. The use of reliable software reduces the room for human errors. Even one tax penalty may be too costly for a small business owner.

Additionally, keep organized records of all payroll transactions. Meticulous documentation helps in case of audits or disputes regarding taxes.

Here are some key steps for tax compliance:

• Understand requirements under applicable federal, state, and local tax and employment laws.

• Use reliable sources for updates.

• Leverage tax software for accuracy.

• Maintain detailed payroll records.

Consulting with a tax professional can provide tailored advice and peace of mind. They offer insights that are especially valuable for small business payroll management.

Finally, ensure that you provide your employee with all necessary forms, like W-2, on time. Correct documentation facilitates smooth payroll for both the business and the employee.

Tax Reporting Deadlines

Most small business owners need to make estimated payments every three months. These payments cover income tax and employment taxes. Failure to make the quarterly estimated payments can result in penalties and interest. These quarterly payments are due: 

• April 15

• June 15

• September 15

• January 15

How to Make Quarterly Payments

Small businesses should use the U.S. Treasury’s Electronic Federal Tax Payment System (EFTPS) for tax payments. The IRS offers a variety of other payment options on its website. 

If you have employees, you will also use Form 941. The employer’s quarterly federal tax return reports income taxes and Social Security and Medicare withheld from employees’ paychecks. You use this form to pay the employer’s portion of Social Security and Medicare, as well. 

You don’t have to tackle payroll and payroll tax management alone. SurePayroll can help your small business with automated payroll, tax calculations, filings, deposits and more. 

Common Payroll Mistakes and How to Overcome Them

Common payroll mistakes include misclassifying employees, miscalculating payroll taxes, incorrectly processing wage garnishments, paying bonuses incorrectly and poor recordkeeping. 

The best way to reduce payroll errors is to prevent them. You can do this by understanding the payroll process well. Keeping accurate records is also important. Here are a few tips on common payroll mistakes and how to overcome them.

• Misclassifying employees. Check each job using FSLA rules and state wage laws. This will help you classify the job as exempt or non-exempt.

• Miscalculating payroll taxes. Take time to fully understand what payroll taxes you’re responsible for paying as a small business owner. Payroll taxes include FICA taxes.

• FICA taxes consist of Social Security and Medicare taxes. They also include state unemployment insurance (SUI) and federal unemployment taxes (FUTA). Include income taxes where applicable.

• You also need to understand tax rates and withholding and payment schedules. The IRS tax guide for small business offers a regularly updated resource.

• Another option is to work with an accountant or bookkeeper. You can also connect with an online payroll provider like SurePayroll. SurePayroll helps simplify how you pay your workers and file taxes.

• Incorrectly processing wage garnishments. You need to act fast when you get a court order to withhold wages. You play an important role in helping your employee pay their debts.

• Withholdings change based on the garnishment. It’s important to know the exact percentage to withhold. This helps you follow legal requirements. It also prevents negative effects on the employee or your business.

• Poor recordkeeping. The Small Business Administration helps small business owners. They provide a clear review of the key steps to start, run, and grow your business. This includes a guide on how to keep records.

• Set aside time at least monthly to organize your business records. Federal law does not require a specific recordkeeping system. You should create one that fits your business needs and your ability to manage it.

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 Final Thoughts

Properly setting up payroll for one employee sets the stage for efficient business operations. It also helps establish a key component of your workplace culture—trust.

While processing payroll is a fundamental task in any business, it's not your primary focus. If you’d prefer to run payroll on your own, keep in mind that some mistakes are easier to fix than others.

The best way to do payroll for one employee is the way that works best for you.

A small business payroll software provider, like SurePayroll® By Paychex, makes paying workers easier. It automates payment timing and calculates payroll taxes. It also helps you follow local, state, and federal rules. That means you have more time to stay focused on your business, customers, and employees—and grow your business.

Learn More. How to Process Payroll: A Step-by-Step Guide

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