Running payroll for one employee involves a clear, multi-step process: you must register as an employer to get an EIN, gather essential employee paperwork like Forms W-4 and I-9, calculate gross pay and tax withholdings each pay period, and then pay your employee while remitting taxes to federal and state agencies. Many of the 33 million small businesses in the U.S. are lean operations, and if this sounds like you, it’s easy to think you can skip the formalities. But handling payroll for 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 the details of each step, from understanding pay calculations to finding the right software.

Why Formal Payroll for One Employee is Non Negotiable

It might seem like overkill, but setting up a formal payroll for one employee is essential 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 for one employee:

• 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. For a salaried employee, this is their annual salary divided by the number of pay periods in the year. For an hourly employee, you calculate it by multiplying their hourly rate by the number of hours worked in the pay period, including any overtime calculations required by the Fair Labor Standards Act (FLSA).
• Employee Withholdings: This is money you subtract from the employee’s gross pay for taxes. It includes federal income tax (based on their Form W4), 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.

How Your Business Structure Dictates 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.

The Challenges of Solo Payroll Management

Managing payroll for one employee seems straightforward, but manual processing is filled with potential pitfalls that can consume time and create stress. For a small business owner, these challenges are significant.

• Time Consumption: Small business owners spend a surprising amount of time on payroll tasks, sometimes up to 80 hours a year. This is valuable time that could be spent on growing the business.
• Risk of Human Error: Manual data entry and calculations using spreadsheets are highly prone to mistakes. A simple typo can lead to incorrect pay, unhappy employees, and complicated corrections.
• Compliance Complexity: Tax laws and labor regulations are constantly changing, making it difficult for non experts to stay compliant. This creates a risk of incurring penalties for incorrect filings or missed deadlines.
• Data Security and Privacy: Handling sensitive employee information like Social Security numbers and bank details on unsecured spreadsheets or documents poses a major security risk. A breach can damage trust and lead to legal liability.

Setting Up Your Payroll System: A Step by Step Guide

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. The average salary for a small business owner in the U.S. is around $69,000, but 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.

Next, select a payment method.

• Direct Deposit: An overwhelming 93% of U.S. workers are paid this way. It’s fast, secure, and creates a clean digital record for both you and the employee.
• Paper Checks: While traditional, paper checks are less secure, require more administrative effort, and can be inconvenient for the employee.
• Pay Cards: These are prepaid cards that you load with the employee’s net pay. They can be an option for employees without bank accounts, but check state laws regarding their use.

Step 3: Gather Information and Handle Registration

Before your first payroll run, you must collect specific information and register with the proper agencies.

Employer Information Requirements:

• Get an Employer Identification Number (EIN): You need an EIN from the IRS to report taxes. Applying online is the fastest method.
• Register with State and Local Agencies: You’ll need to register with your state’s tax and labor departments to get tax ID numbers for state income tax withholding and unemployment insurance.
• Gather Business Details: Have your legal business name, address, company type, and business bank account details (routing and account numbers) ready.

Required Employee Paperwork:

• Form W4: Every employee must complete a Form W4 to determine their federal income tax withholding.
• Form I9: You must use this form to verify the employee’s identity and eligibility to work in the United States within three days of their start date.
• State Withholding Forms: Check if your state requires its own specific withholding allowance certificate.
• Direct Deposit Authorization: If using direct deposit, have the employee sign a form authorizing the transaction and providing their bank account and routing number.
• Personal Details: Collect the employee’s full legal name, address, Social Security number, and date of birth.

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 W2s.

Do You Need a Payroll Service for One Employee?

While you are not legally required to use a payroll service, doing it yourself exposes you to the challenges of manual processing: errors, compliance risks, and significant time investment. A payroll service is not just for large companies. For a startup or a solo founder, a service can simplify the process, ensure accuracy, and guarantee compliance, freeing you to focus on your core business.

Choosing the Right Tools: Manual 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.

What Does Payroll Service for One Employee Cost?

The cost of payroll services typically includes a monthly base fee plus a smaller fee per employee. For a business with one employee, you can expect to pay a base fee ranging from approximately $40 to over $100 per month, with a per employee charge between $4 and $22. For example, some basic plans start at a $39 monthly base fee plus a per employee cost. These plans automate critical tasks like tax calculations and filings, which can easily justify the expense when compared to the cost of errors or time spent on manual work.

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 for one employee, 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. The Fair Labor Standards Act (FLSA) and IRS have strict rules about worker classification. Misclassification can lead to severe penalties, including back taxes, fines, and legal action.
• 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:

• Recordkeeping: The FLSA requires you to keep detailed payroll records for at least three years, and tax records for at least four. These include pay rates, hours worked, deductions, and tax filings.
• Reporting New Hires: You must report your new hire to your state’s new hire directory, which helps enforce child support orders.
• Securing Workers’ Compensation: Most states mandate workers’ compensation insurance from the very first employee to cover work related injuries.
• Filing Timely Reports: File quarterly (Form 941) and annual (Form 940, W2s) reports on time.

Frequently Asked Questions

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 W4 (for federal tax withholding) and a Form I9 (to verify their eligibility to work in the U.S.). You should also collect a direct deposit authorization form and 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.