Setting up payroll for just one employee involves careful consideration to ensure everything is handled accurately and legally. Here’s a comprehensive guide to help you navigate this process effectively.
1. 1 Employee Payroll-Understanding Payroll Basics and Classification Challenges
When you payroll one employee, especially when hiring your first employee, you still have to handle legal compliance and tax obligations. Begin by classifying your worker as either a contractor (1099) or an employee (W2), since the rules to pay contractors differ from employee payroll and getting employee running right for one person keeps the process simple and compliant. It’s crucial to accurately classify your worker; misclassifying an employee as an independent contractor without a reasonable basis can lead to liabilities for employment taxes, as per Internal Revenue Code section 3509. Misclassification can also trigger penalties from the U.S. Department of Labor. For more detailed guidance on classification, visit the IRS’s guidelines here, read FRIDAY’s comprehensive discussion on the topic here, and explore how FRIDAY simplifies payroll for contractors and small businesses.
2. 1 Employee Payroll-Compliance with Payroll Taxes, Tax and Insurance Regulations
You must register your company to set up payroll with the proper federal and state agencies for applicable tax requirements, including your state’s withholding tax, state unemployment insurance, and any state income tax obligations, even if you only have 1 Employee on Payroll. Note: If you have employees working in multiple states, you must register with each state individually.
Before the first payroll, collect employee information from each new hire so a new employee can complete Form W-4 for federal tax withholding and any required state tax withholding forms, since tax withholdings and state tax withholding requirements vary by state. You must also verify the employee’s identity and work eligibility with Form I-9 within the required business days, and gather any needed bank account information for direct deposit.
In some states, a combined registration option is available for both the Withholding Tax and Unemployment Insurance Divisions. This option will be marked as ‘combined registration’ in the withholding column. With the exception of a handful of states, you can file this application online. Below are the links for each individual state by tax type. For states that do not offer an online registration option, we have indicated this as ‘paper only.’ Note: If both you and the employee work in multiple states, you must register with each state separately. Comprehensive state-by-state registration information can be accessed here. Be prepared with your legal and mailing address, the business start date, key business information, and an employer identification number, because you need an EIN to file payroll taxes.
Choose a pay schedule and pay frequency that comply with state laws, align with your pay periods, and clearly tell your employee how often they will be paid.
As you run payroll, employers are responsible to withhold taxes from wages, including local taxes where required, and withhold federal income tax from each paycheck based on employee information, then remit payroll taxes to the proper federal and state agencies. That includes federal income tax reporting and hire reporting for each new hire where required, plus state tax filings as required and unemployment tax obligations. Your tax filings should also include Form 941 each quarter, which you file quarterly to report withheld taxes, and you must pay federal unemployment tax annually. Keep payroll records and tax filings for at least four years.
3. 1 Employee Payroll-Understanding Insurance Requirements
Ensure you meet state-mandated insurance requirements like workers’ compensation, short-term disability, and paid family leave. Each state has specific regulations which you can review in detail through the NFIB’s state-by-state guide here.
4. 1 Employee Payroll-Choosing the Right Payroll Software
Select software that helps you run payroll, save time, and stay compliant rather than add admin work. ADP payroll software is rated #1 on G2 for small business. 9 out of 10 ADP customers find the software intuitive. FRIDAY, for example, is designed for small businesses (1 to 50 employees), emphasizing simplicity and effectiveness without unnecessary features as payroll software for small businesses. It can also automate tax calculations, support filings, and simplify the overall payroll process, while some online payroll services and payroll services also handle related compliance tasks. This helps in maintaining focus on essential tasks and avoids over-complication. Even for a single employee, payroll for one employee still means tracking accurate time records, using time tracking within the payroll workflow, computing pay, handling withholdings, and distributing wages each pay period. Gusto Solo says solopreneurs can save $6,745 annually in taxes.
5. Managing Hourly vs. Salary and Tracking Time
For hourly employees, tracking employee hours is essential because those records are used to compute pay accurately each pay period as part of payroll processing. Utilize a reliable system to track employee hours worked, including overtime. Accurate time records are essential for payroll compliance and support correct tax calculations. Salary employees are paid a set amount, but payroll deductions may still include health insurance and employer contributions such as retirement benefits where offered, while tracking their hours can still be important for managing PTO and ensuring compliance with labor laws.
FRIDAY Helps Small Businesses Manage and Pay Their Team the Right Way
When it comes to managing, tracking, and paying your employees, even 1 Employee Payrolls, additional help goes a long way, especially when employee turnover rates are increasing in the workforce. If your business is an s corporation, payroll can also help s corp owners stay compliant while paying themselves a reasonable salary. An s corp can reduce self employment tax and allow profit distributions, which gives corp owners major tax advantages and can optimize tax savings for solopreneurs, but it also brings additional cost and quarterly estimates that may affect a personal return and cash flow.
FRIDAY is the simplest software created to help small businesses manage, track, and pay their team without any paperwork involved.
FRIDAY is an easy to use, yet powerful payroll and team management solution. It can help you pay your employee on a consistent schedule, offer direct deposit, use direct deposit securely by storing bank account information, and support small business owners. Stay up to date on our small business payroll and HR blog, where we frequently post educative and informative articles for small business owners.
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Pincus Schiff is a payroll software specialist at Friday App, where he helps businesses simplify payroll, stay compliant, and automate their workflows. He writes about payroll best practices, compliance, and the latest in workforce technology.
