Getting payroll right is a crucial step for any business, no matter how small. With over 33 million small businesses in the U.S., a huge number are very lean operations, often with just a single person on the payroll. If that sounds like you, it’s easy to think you can skip the formalities. But running payroll for one employee, whether it’s yourself or your first hire, comes with the same legal and tax duties as a much larger company.

Getting it right from day one prevents costly mistakes, builds a solid financial foundation, and keeps you compliant. This guide will walk you through everything you need to know, from choosing a business structure to finding the right software.

Why Bother with Formal Payroll for One Employee?

It might seem like overkill, but setting up a formal payroll for one employee is non negotiable for several reasons. First and foremost is compliance. All businesses must follow federal, state, and local payroll laws, and failure to do so can lead to hefty penalties.

Beyond just avoiding fines, proper payroll:

• Builds Your Financial Future: It ensures you (or your employee) are contributing to Social Security and Medicare, which builds eligibility for future benefits.
• Creates a Financial Record: A documented salary history is essential for personal milestones like securing a mortgage or a loan.
• Separates Business and Personal Finances: Paying a formal salary creates a clear and defensible line between company money and personal funds.
• Prepares You for Growth: Establishing a solid payroll process now makes adding your second, third, or tenth employee a much smoother transition.

The Core Components of a Paycheck

Before you can run payroll for one employee, you need to understand what goes into a single paycheck. It’s more than just a simple payment.

• Gross Pay: This is the total amount earned before any deductions, whether it’s a fixed salary or based on hourly wages.
• Employee Withholdings: This is money you subtract from the employee’s gross pay for taxes. It includes federal income tax (based on their Form W-4), Social Security tax (6.2% of wages up to an annual limit), and Medicare tax (1.45% of all wages).
• Employer Contributions: As the employer, you are also required to pay taxes. You must match the employee’s Social Security and Medicare contributions. Additionally, you’ll pay federal unemployment tax (FUTA), which is effectively 0.6% on the first $7,000 of an employee’s wages for most businesses, plus any state unemployment taxes (SUTA).
• Net Pay: This is the final take home amount after all taxes and any other deductions (like health insurance or retirement contributions) have been subtracted.

Your Business Structure Dictates Your Payroll Rules

How you handle payroll for one employee depends almost entirely on your company’s legal structure. This is one of the first and most important decisions you’ll make.

Sole Proprietorships: Owner Draws, Not Paychecks

If you’re a sole proprietor, the IRS views you and your business as a single entity. Because of this, you don’t put yourself on a formal payroll. Instead, you take “owner’s draws” whenever you need to pay yourself. You’ll report your business profit on Schedule C of your personal tax return and pay self employment taxes (15.3%, which covers both the employee and employer portions of Social Security and Medicare) on that profit.

However, if you hire even one non owner employee, you must set up a formal payroll system for that person with all the required tax withholdings and contributions.

Single Member LLCs: The Flexible Choice

By default, a single member Limited Liability Company (LLC) is taxed just like a sole proprietorship. The owner takes draws and pays self employment tax on the profits reported on Schedule C. No formal payroll is needed for the owner.

The big advantage of an LLC is its flexibility. You can elect to have your LLC taxed as an S Corporation. If you make this election, the game changes, and you are then required to pay yourself a salary through a formal payroll system.

S Corporations: The “Reasonable Salary” Requirement

For an S Corporation (S Corp), the rules are clear: any shareholder who does substantial work for the business is an employee and must be paid a salary through payroll. You can’t just take all the profits as distributions to avoid payroll taxes. The IRS requires you to pay yourself “reasonable compensation” for your work.

What’s reasonable? A good starting point is to figure out what you would pay someone else to do your job. Failing to do this can attract IRS scrutiny. In one famous case, an accountant paid himself a salary of only $24,000 while taking over $200,000 in distributions. The IRS reclassified a large portion of those distributions as wages and sent him a bill for the unpaid payroll taxes.

C Corporations: Salary as a Tax Strategy

A C Corporation (C Corp) is a completely separate legal and tax entity. It pays corporate income tax on its profits. If profits are then paid to owners as dividends, they are taxed again on the owner’s personal return, a situation known as “double taxation”.

To reduce the corporate tax bill, owner employees of a C Corp typically pay themselves a salary. This salary is a deductible business expense for the corporation, lowering its taxable profit. In a C Corp, the owner employee must be on the payroll just like any other staff member.

Setting Up Your One Employee Payroll System

Once your business structure is set, follow these steps to get your payroll for one employee up and running.

Step 1: Determine a Fair Salary

If you are an owner employee of a corporation, you need to set a reasonable salary. Research market rates for your role, experience, and industry. While the average salary for a small business owner in the U.S. is around $69,000, this can vary dramatically. Choose a figure that is both defensible to the IRS and affordable for your business.

Step 2: Choose a Pay Schedule and Payment Method

Decide how often you’ll run payroll. Biweekly is the most common pay schedule in the U.S., used by about 43% of private businesses, but weekly, semimonthly, and monthly are also options. If you’re the only employee, a monthly schedule might be the simplest.

For payment, direct deposit is the modern standard. An overwhelming 93% of U.S. workers are paid this way. It’s fast, secure, and creates a clean digital record.

Step 3: Handle the Paperwork and Registration

Before running your first payroll, you must:

• Get an Employer Identification Number (EIN) from the IRS. It’s free and can be done online.
• Register with your state’s tax and labor departments for withholding and unemployment tax accounts.
• Collect employee forms. This includes a completed Form W-4 to determine federal income tax withholding and a Form I-9 to verify employment eligibility. Yes, even if you are the only employee, it’s good practice to fill these out for your own records.

Step 4: Calculate, Pay, and File

Each pay period, you’ll repeat a simple cycle:

1. Calculate gross pay.
2. Subtract tax withholdings to determine net pay.
3. Pay the employee and provide a pay stub.
4. Set aside the withheld taxes and your employer tax contributions.
5. Deposit these taxes with the IRS and your state according to their required schedule (often monthly for small employers).
6. File the necessary reports, like the quarterly Form 941 and the annual Form 940 and W-2s.

Choosing the Right Tools: DIY vs. Software

You could manage all of this with spreadsheets and calendars, but it leaves you open to human error. Studies show that roughly one in five payrolls contains a mistake, and each error costs an average of $291 to fix, not including potential penalties.

The Case for Payroll Software (Even for One)

This is where technology can be a huge help. Using a payroll service automates calculations, handles tax payments, and files forms for you, significantly reducing the risk of errors. For a small business focused on growth, automating the payroll for one employee frees up valuable time. Platforms like Bolto are built specifically for startups, offering streamlined U.S. payroll that can scale with you.

Key Software Features for a Solo Operation

When looking for payroll software for one employee, prioritize: After you review the features below, if you’re new to HR platforms, this explainer on HRIS systems can help you choose the right fit.

• Affordability: Look for a low base fee and a reasonable per employee cost.
• Automated Tax Filing: The service should automatically calculate, pay, and file your federal, state, and local payroll taxes.
• Direct Deposit: This should be a standard, included feature.
• Ease of Use: The platform should be intuitive, since you’re the entire HR department.
• Customer Support: When you have a question, you need access to fast and reliable help.

How to Select Your Payroll Provider

To choose the right provider, compare pricing, read reviews from other small business owners, and always take advantage of a product demo. Seeing the software in action is the best way to know if it’s a good fit. If you might expand internationally, read our global payroll solutions guide to understand options beyond the U.S. If you’re a startup with ambitions to hire globally or need an all in one solution that combines recruiting with payroll, you might want to schedule a demo with Bolto to see how a unified platform can simplify your operations from day one.

Staying Compliant and Avoiding Costly Mistakes

With payroll, the details matter. Stay vigilant to avoid these common slip ups.

Common Payroll Errors to Sidestep

• Misclassifying an Employee: Never treat a legitimate employee as a 1099 contractor to avoid payroll taxes. This can lead to severe penalties if you’re audited.
• Missing Deadlines: Late tax deposits can trigger IRS penalties ranging from 2% to 15% of the amount due. Use a calendar or software to track every deadline.
• Using Outdated Tax Rates: Tax laws and wage bases change annually. Make sure you are always using the current year’s figures.

Key Legal and Compliance Duties

Remember, you are responsible for:

• Filing quarterly (Form 941) and annual (Form 940, W-2s) reports on time.
• Reporting your new hire to your state’s new hire directory.
• Securing workers’ compensation insurance if required by your state (most mandate it from the very first employee).
• Keeping detailed payroll records for at least four years.

Frequently Asked Questions About Payroll for One Employee

Do I have to run payroll if I’m the only employee?
It depends on your business structure. If you are an S Corp or C Corp owner who works in the business, then yes, you must be on payroll. If you are a sole proprietor or a single member LLC (taxed as a sole prop), you do not run payroll for yourself; you take owner’s draws instead.

Can I just pay my one worker as a contractor?
No. A worker’s classification is determined by the nature of their work and your level of control over it, not by your preference. Intentionally misclassifying an employee as a contractor to avoid payroll is illegal and can result in significant back taxes and penalties.

What paperwork do I need for a new hire?
For any new employee, you must have them complete a Form W-4 (for federal tax withholding) and a Form I-9 (to verify their eligibility to work in the U.S.). You should also check for any state specific withholding forms.

How do I fix a payroll mistake?
Most minor errors can be corrected on the next paycheck. If you made a mistake on a tax filing, you can file an amended return, such as Form 941 X for the quarterly report. The key is to address mistakes promptly and document the correction.

Managing payroll for one employee can feel daunting, but it becomes a simple routine once you have the right processes and tools in place. By handling it correctly from the start, you set your business on a path for compliant and sustainable growth. For inspiration, see how Assembly made their first-ever hire with Bolto. If you want to offload the administrative burden, an all in one platform like Bolto can handle your payroll, recruiting, and HR, letting you focus on what you do best: building your business.