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Mar 06, 2024 Matt Venuto

How To Set Up Payroll for 1 Employee in 7 Simple Steps

How To Set Up Payroll for 1 Employee in 7 Simple Steps

Your small business is growing — you’ve just hired your first employee. It’s an exciting time when you’ll be daydreaming about your business’s future… but before you get too carried away, you need to ensure you have the right systems set up to support that employee.

First and foremost, you have to pay them. 

Setting up payroll can seem challenging, especially if this is your first time. Suddenly, there are taxes, forms, schedules, and calculations you've never even heard of. How do you make sure everything is set up accurately and legally?

The good news is that you can create a simple yet compliant single-person payroll with some research and organization. This article will walk you through the seven key steps to set up payroll for one employee, giving you the foundational information you need to be confident about your first payroll process.

How to Set Up Payroll For 1 Employee: First Things First 

Setting up payroll properly from day one establishes a strong foundation for your business, even if your team is just you (and maybe your dog). 

Documenting hours worked, withholding taxes, remitting payments on time — these boring but critical details build trust with both employees and customers that you operate professionally.  The rules seem to change every quarter, carrying serious penalties if you misstep. But don't worry. You don't have to become a payroll expert overnight! 

Instead, leverage a trusted partner like ConnectPay. With a payroll partner, you can leverage the experience of a full team when managing your payroll processes.  They also provide helpful context on state and federal regulations to run payroll confidently. In short, with the right partner, you can focus on exciting parts of entrepreneurship, knowing the details are covered.

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How to Set Up Payroll For 1 Employee: 7 Steps to Done 

1. Know Your Employer Details

It’s essential to establish your business for tax and employment purposes legally. First, get your Employer Identification Number (EIN) from the IRS. It’s free to apply online, and this ID number helps identify your business for tax reasons at both state and federal levels.

This is also a great opportunity to research specific permits or licenses your state requires for your business to operate legally. Staying compliant from day one protects you from legal issues you could run into down the road — or right now as you hire your first team member.

2. Get Your Employee’s Details

Once you have your employer details squared away, it's time to collect the required paperwork from your new hire. Have them complete federal form W-4 as well as I-9, which makes sure they’re eligible to work in the United States. You should also collect any state or local tax forms at this point.

Resist the urge to skip the paperwork and run your first payroll prematurely — even though your employee may be itching to get paid! Despite the excitement of hiring, you must complete all the mandatory forms first. This process protects you legally and ensures you follow accurate pay and withholdings rules.

For independent contractors, have them fill out a 1099 form instead of a W-2. Knowing the difference in worker classification and submitting the right tax forms keeps you compliant and shows your team — however small — that you operate professionally.

3. Choose Your Ideal Payroll Schedule

Next, it's time to map out consistent pay periods that align with your business workflow. When selecting your pay schedule, set your pay frequency at a rate that balances your business’s interests in terms of consistent cash flow while keeping your employee happy.

State laws dictate how often you have to pay hourly employees, so confirm you comply on whichever cadence you choose. Common options are weekly, bi-weekly, semi-monthly, or even monthly payments. Bi-weekly and semi-monthly schedules are most typical for small businesses. But as you consider your options, choose the interval that both works smoothly now and can support your growth down the road.

4. Figure out Gross and Net Pay

Even with one employee, accurate paydays require care and precision. When payday arrives, make sure your employee receives every dollar they earned while holding the proper taxes.

How do you figure out what these figures are? Gross pay is the number of hours worked multiplied by the pay rate (hours X pay rate = gross pay). Net pay is gross pay minus tax and other deductions — your employee’s final "take home" amount.

Even if math is your strong suit, use spreadsheets or payroll software to simplify these pay calculations and keep you from making pay-related errors. Provide your employee with clear pay stubs detailing gross wages, deductions, and final net payment amounts so they know exactly where their money is going. And, make sure you keep copies for your records and tax purposes, too.

5. Determine Proper Withholdings

Paying your first employee goes beyond calculating gross wages and net pay. You must properly withhold mandatory taxes and voluntary deductions from each paycheck to comply with tax requirements.

Withholdings often include: 

  • Federal, state, and local income taxes
  • Social Security
  • Medicare
  • 401K contributions (if you offer it)
  • Health insurance premiums
  • Other authorized deductions

Tax rates change regularly, so reference IRS guides and online calculators to make sure your withholdings are precise. 

If you’re already learning how to set up payroll for 1 employee, it’s wise to consider what else you might need as your team grows. One way to create a scalable process is to automate your tax and deduction calculations to simplify withholding. 

Accurately applying current rates safeguards you from tax penalties while building trust with your team. So, while it’s not the most glamorous task, keeping up with evolving deduction rates makes sure every payday is right the first time.

6. Keep Thorough Payroll Records 

Payroll diligence doesn't end on payday. Keeping organized records of your employee’s gross and net pay, all deductions, tax payments, and any payment corrections is essential. 

Save digital copies of pay period calculations, pay stubs, and relevant tax documentation in secure cloud storage. While digital files are convenient, store paper copies as backup. Thorough payroll records let you seamlessly report taxes and provide evidence if any payment questions arise later. 

7. Manage Payroll Tax Compliance 

Payroll doesn’t end at paying your employees: you must also pay required company taxes related to payroll, unemployment and other state obligations. Report your new hire to state agencies to figure out what payroll taxes are required, and file quarterly payroll forms to stay compliant. Meeting deadlines throughout the year makes tax season less stressful for everyone.

Complex tax calculations and be confusing, so use online tools to simplify and manage your compliance process. Automate filings when possible so you never miss a deadline, even as your team grows. If you’re not confident managing payroll tax compliance in-house, consider outsourcing required tax filings to a local CPA partner

Stressed About How to Set Up Payroll For 1 Employee? 

As a small business owner, properly setting up payroll lays a critical foundation - even if your team is just you and your first team member. Don't tackle payroll complexities alone and risk mistakes, especially when you should focus on growth! 

Instead, lean on the experience of partners like ConnectPay to guide you. Our experienced payroll specialists will teach you how to set up payroll for 1 employee and handle the full spectrum of calculations, payments, filings, and record keeping.

You’ll enjoy peace of mind knowing your payroll is accurate and compliant every cycle, no matter how large your team grows. Schedule a free consultation to discuss your payroll needs and see if we can streamline success together.

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Published by Matt Venuto March 6, 2024