How to Do Payroll for One Employee
Payroll for one employee follows exactly the same rules as payroll for fifty: you withhold income tax and FICA, pay the employer share plus unemployment taxes, deposit on your assigned schedule, file quarterly returns, and issue a W-2 at year end. The volume is smaller, but not one compliance obligation goes away.
Because the work is identical and the cost is dominated by a provider's monthly base fee, the practical answer for most single-employee businesses is the cheapest genuinely full-service payroll plan you can find. Doing it by hand to save a small monthly fee means personally tracking deposit deadlines all year.
This guide covers the cycle for one employee, including the very common case of an S corporation owner paying themselves a reasonable salary.
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This is general educational information about running payroll, not tax, legal, or accounting advice for your specific situation. Rates, wage bases, thresholds, and deadlines change and vary by state. Confirm current requirements with the IRS and your state agency, and talk to your own CPA about your business — especially about reasonable compensation if you're an S corporation owner.
The short answer
Payroll for one employee follows exactly the same rules as payroll for fifty: you withhold income tax and FICA, pay the employer share plus unemployment taxes, deposit on your assigned schedule, file quarterly returns, and issue a W-2 at year end. The volume is smaller, but not one compliance obligation goes away.
Because the work is identical and the cost is dominated by a provider's monthly base fee, the practical answer for most single-employee businesses is the cheapest genuinely full-service payroll plan you can find. Doing it by hand to save a small monthly fee means personally tracking deposit deadlines all year.
This guide covers the cycle for one employee, including the very common case of an S corporation owner paying themselves a reasonable salary.
What you need before you start
- Your federal EIN.
- State withholding and unemployment accounts in the state where the employee works.
- A completed Form W-4 and Form I-9 from the employee.
- The employee's pay rate or salary, and whether they're exempt or non-exempt from overtime.
- A pay schedule and a funded business bank account.
- If you're an S corporation owner paying yourself: a documented reasonable compensation amount set with your CPA.
Step-by-step
- 1
Confirm the person is actually an employee
If the worker is genuinely an independent contractor, none of this applies — you pay them gross, report the payments on a Form 1099-NEC, and skip withholding entirely. That's dramatically cheaper and simpler, which is exactly why the classification has to be honest rather than convenient.
Classification depends on the substance of the relationship and how much control you exercise over the work. An S corporation owner performing services for their own company is an employee of that company for these purposes.
Misclassifying an employee as a contractor to avoid payroll can produce back taxes, interest, and penalties across multiple years — far more than any software you were avoiding.
- 2
Register as an employer before the first pay date
You need an EIN plus state withholding and unemployment accounts in the state where your employee physically works. One employee doesn't change this: you're an employer with a single employee, not an informal arrangement.
If your one employee works in a different state than your business, register in their state. Withholding generally follows where the work is performed.
- 3
Set the pay amount and schedule
For an hourly employee, track hours by workweek and keep overtime hours separate. For a salaried employee, confirm whether they're actually exempt from overtime under federal and state rules rather than assuming a salary settles the question.
For an S corporation owner-employee, the salary should be reasonable compensation for the services actually performed — determined with your CPA based on the role, hours, and comparable pay, not by a rule-of-thumb percentage of profit. Many owners run the same amount every period, which keeps the documentation and bookkeeping simple.
current IRS figure being verified: insert the current federal overtime threshold and any state overtime rules that apply.
- 4
Calculate withholding and employer taxes each period
Withhold federal income tax based on the Form W-4, the employee share of Social Security and Medicare, and state and local income tax where applicable. Social Security stops applying once wages reach the annual wage base — current IRS figure being verified: insert the current Social Security wage base and the current FICA rates, with the date verified.
Your business separately owes the employer share of Social Security and Medicare, federal unemployment tax, and state unemployment tax — current IRS figure being verified: insert the current federal unemployment rate and wage base. Note that with one employee you may cross state unemployment wage-base ceilings early in the year, which makes the tax uneven across quarters and surprises owners who budget a flat monthly figure.
- 5
Pay the employee and deposit the taxes
Pay on your stated pay date and provide an itemized pay stub showing gross pay, each tax withheld, each deduction, and net pay. Then deposit the withheld and employer taxes on your assigned federal schedule and your separate state schedule.
Your federal deposit frequency is assigned based on your prior payroll tax liability, not chosen — current IRS figure being verified: insert the current deposit schedule rules, lookback period, and due dates. With one employee you're usually on the less frequent schedule, but confirm rather than assume, because a wrong assumption here is what generates penalties.
The taxes you withhold aren't your money. Keep them in the account until deposited, even when the total is small enough to feel inconsequential.
- 6
File quarterly and year-end returns
You still file a quarterly federal employment tax return on Form 941 and whatever quarterly withholding and unemployment returns your state requires, even for one employee, and even in a quarter with minimal activity. At year end you file an annual federal unemployment return on Form 940 and issue the employee a Form W-2.
Reconcile each quarter: total the wages and each tax withheld across pay runs, compare to deposits, and fix any difference before filing. With one employee this takes minutes, so there's no excuse for carrying an error to year end.
current IRS figure being verified: insert current quarterly and year-end filing deadlines for Forms 941, 940, and W-2.
- 7
Keep the records
Retain pay records, timesheets, tax filings, deposit confirmations, and the employee's W-4 and I-9. If you're an S corporation owner, also keep the documentation supporting how you determined reasonable compensation.
For a single-employee payroll this is a thin folder, which makes it that much sillier to skip. Complete records are what turn a payroll notice into a ten-minute reply instead of a reconstruction project.
Common mistakes
Assuming one employee means simplified rules
There's no small-employer exemption from withholding, deposits, quarterly filings, or W-2s. Treat one employee exactly as you would twenty, on the same deadlines.
Paying an S corporation owner only in distributions
An owner performing services for an S corporation generally must be paid reasonable compensation as W-2 wages before taking profit distributions. Set the amount with your CPA and document the basis.
Calling an employee a contractor to skip payroll
Classification follows the substance of the working relationship, not what's cheaper. Reclassification exposes you to back taxes, interest, and penalties that dwarf the cost of running payroll properly.
Buying a self-service plan by accident
Some low-cost plans only calculate payroll and leave the filings and deposits with you. At one employee the monthly saving is trivial and the penalty exposure isn't, so confirm in writing that federal, state, and local filings are included.
Budgeting a flat monthly payroll tax cost
Unemployment taxes typically stop once an employee's wages pass the applicable wage base, so your employer tax cost is front-loaded in the year. Expect the early quarters to be heavier than the later ones.
Skipping a quarterly filing because there was little activity
Filing obligations generally continue even in quiet quarters. If you're registered as an employer, file on schedule rather than waiting for something to report.
When to use software instead
For one employee, software is almost always the right answer, because the compliance work is identical to a larger payroll while the fee is small in absolute terms. Buy on base price as long as the plan is genuinely full-service, since at one employee the monthly base fee is nearly the entire bill.
The one situation where doing it yourself makes sense is when your CPA or bookkeeper is already filing on your behalf as part of an engagement. In that case a calculation-only plan is a deliberate, documented choice rather than a shortcut.
If the person you're paying is a genuine 1099 contractor rather than an employee, skip employee payroll entirely and use a contractor-only plan (Square Payroll offers a $0 base; Gusto's regular price is $35/month plus $6 per contractor, with promotional $0-base pricing often available).
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Frequently asked questions
How do I do payroll for one employee?
The same way as for any employer: withhold income tax and FICA, pay the employer share plus federal and state unemployment taxes, deposit on your assigned schedule, file quarterly returns such as Form 941, and issue a Form W-2 at year end. Nothing is waived because you only have one employee.
Is it worth paying for payroll software for one employee?
Usually yes. The compliance work is identical to a larger payroll, and the monthly fee is small compared with the cost of one missed deposit. Because the base fee dominates the bill at one employee, shop on base price as long as the plan is genuinely full-service.
Do I have to file quarterly returns with only one employee?
Generally yes. Once you're registered as an employer, quarterly federal and state filing obligations apply on schedule, including in quarters with little activity. Confirm the current due dates before your first filing.
How do I run payroll for myself as an S corporation owner?
You're an employee of your own corporation for this purpose, so you set a reasonable compensation amount for the services you perform, run it through payroll with normal withholding, and receive a W-2. The reasonable amount depends on the role, hours, industry, and comparable pay — set and document it with your CPA.
Why did my payroll taxes drop later in the year?
Unemployment taxes and the Social Security portion of FICA generally stop applying once an employee's wages reach the applicable wage base for the year. With one employee that ceiling can be reached early, which makes your employer tax cost heavier in the first part of the year.
Can I just pay my one worker as a contractor instead?
Only if the relationship genuinely qualifies as independent contracting based on how the work is controlled and performed. Misclassification can result in back taxes, interest, and penalties well beyond the cost of running payroll properly, so check with a tax professional first.
The bottom line
One employee is a full payroll obligation in a small package. Every deposit deadline and every filing still applies to you.
The cheapest compliant setup is a low-base full-service plan plus a calendar reminder before each deposit date. That combination costs very little and removes almost all of the risk.
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