How to set up payroll for one employee in 6 simple steps

As we head into 2025, more and more entrepreneurs are looking to grow their businesses. In fact, the QuickBooks Entrepreneurship in 2025 report found that 44% of business owners plan to hire this year. But with that new hire comes new responsibilities, like setting up payroll. 

Whether you're preparing to make your first hire or simply need a refresher on the essentials, this guide provides a clear, step-by-step approach to setting up payroll for one employee so you can pay them accurately and on time every time.

1. Apply for a federal ID number

An employer identification number (EIN) identifies you as a business entity that’s responsible for paying payroll taxes to the government. According to the IRS, if you have one employee or more (not just independent contractors), you’ll need to apply for one. 

How to get your EIN:

• Online: The fastest and easiest way to get an EIN is to use the EIN assistant on the IRS website. 
• Mail or fax: You can also download and print Form SS-4 [PDF] from the IRS website and mail it in. 
• Phone: International applicants can apply by phone.

2. Learn your state’s withholding requirements

Understanding your state's specific withholding requirements is crucial for accurate payroll. While you'll always withhold federal income tax, state requirements vary. Failing to withhold the correct amounts can lead to penalties and complications.

Examples of state-level withholding requirements:

• State income tax: Most states have an income tax, and you'll need to withhold a percentage from each paycheck.
• State unemployment tax (SUTA): SUTA tax funds unemployment benefits for workers who lose their jobs.
• State disability insurance (SDI): Some states require SDI contributions to benefit employees who can't work due to a nonwork-related illness or injury.
• Paid family leave (PFL): A growing number of states have PFL programs that provide paid time off for family caregiving needs, funded by employee and/or employer contributions.
• Other: Some states might have other specific withholdings, such as for local taxes or occupational privilege taxes.

To ensure compliance, research your state's specific requirements and withholding rates. You can usually find this information on your state's Department of Revenue website or by contacting them directly.

3. Get the required paperwork from your employee

Accurate payroll involves more than just calculating wages. You need to collect certain documents from your employees to ensure you're withholding the correct taxes and complying with legal requirements. These forms provide essential information about their tax withholdings, eligibility to work, and more.

Essential documents for your new employee:

• Form W-4 (Employee's withholding certificate): This form tells you how much federal income tax to withhold from their paychecks.
• Form I-9 (Employment eligibility verification): This form verifies the employee's identity and legal authorization to work in the United States.
• State tax withholding forms: Many states have their own withholding forms for state income tax.
• Direct deposit authorization (if applicable): If you offer direct deposit, your employee needs to provide their bank account information.
• Other documents: Depending on your industry or location, you might need additional documents, such as those related to benefits enrollment or specific job requirements.

Keep these documents securely stored and organized. They are crucial for maintaining accurate payroll records and complying with employment laws.

4. Decide how often you'll pay your employee

Establishing a consistent pay schedule is essential for both you and your employee. It affects your budgeting and cash flow, as well as your employee's ability to manage their finances. While you might have a preference, remember to check your state's laws regarding pay frequency, as there are often restrictions on how long you can go between paychecks.

Common pay frequencies:

• Weekly
• Bi-weekly (every other week)
• Semi-monthly (twice a month)
• Monthly

Ultimately, the best pay frequency depends on your business needs and your employee's preferences. Make sure to communicate the pay schedule clearly and provide any necessary resources to help your employee with budgeting.

5. Choose your payroll system

Next, you’ll need to decide which type of payroll system to use. If you’re like most small-business owners, time is your most valuable asset. Consider your budget, the size of your business, and your comfort level with technology when evaluating different options:

• Online payroll services: Cloud-based platforms that handle all aspects of payroll, from calculations and tax filings to direct deposit. 
• Desktop software: Software installed on your computer that allows you to manage payroll in-house. This can be a more affordable option but requires more manual data entry and updates.
• Accountant or bookkeeper: Outsourcing payroll to a professional can save you time but is often the most expensive option.
• Spreadsheets: While possible for very small businesses, using spreadsheets for payroll is generally not recommended due to the high risk of errors and the time commitment involved.

QuickBooks Payroll is a popular online payroll software that saves time and makes it easier to track important details such as employee hours, overtime, vacations, and deductions like health care premiums and retirement contributions. 

In addition, it calculates the amount of the paycheck and tax withholdings, files the required tax forms, and pays your payroll taxes. Some business owners have their accountant run their payroll, but this can be costly.

6. Run the payroll

After you’ve set up your system, you’re ready to run payroll. If you use a desktop software program, you’ll have to enter the required information and print out the checks. 

If you choose an online payroll service such as QuickBooks Payroll, you simply enter the hours and then either print the checks yourself or use the free direct deposit feature. All that’s left is to report the payroll taxes to the appropriate tax agencies and pay them within the required time period.

Next steps for streamlining your payroll process

You've successfully navigated the initial steps of setting up payroll and paying your employee. Now, it's essential to maintain accurate records, stay informed about tax law changes, and prioritize compliance with all federal, state, and local regulations. Consistent and accurate payroll management is crucial for building trust with your employee and ensuring the smooth operation of your business.

Streamline your payroll process and minimize potential errors with accounting software that offers integrated payroll features. QuickBooks provides tools for tracking employee hours, automating tax calculations and payments, and managing deductions. By leveraging these features, you can free up time to focus on other aspects of your business while maintaining confidence in your payroll accuracy.