Guide
Payroll for your first employee
The day you put someone on a W-2, you become a tax collector for the federal government and your state. This is what that actually involves, in the order it happens, and an honest answer on whether you need to pay for software to do it.
Before the first payday
Four registrations have to exist before you can legally run a payroll. None cost money, and all of them take longer than you expect if you leave them to the last week.
- Federal EIN. Free from the IRS website, issued immediately during business hours. This is your business's tax ID.
- State withholding account. Lets you remit the state income tax you withhold. A handful of states have no income tax and skip this entirely.
- State unemployment (SUTA) account. Separate from withholding, with its own rate assigned to you as a new employer. Our table of wage bases and new employer rates covers all 51 jurisdictions.
- Workers' compensation policy. Required in nearly every state from your first employee. In field trades this is often the largest single line after wages.
The one that gets missed
New hire reporting. Every state runs a new hire directory, and you generally have 20 days from the start date to report. It takes five minutes and carries a penalty if skipped, which is a bad combination for something this easy to forget.
What running payroll actually means, every time
Every pay period, someone has to work through all of this.
- Total the hours, separating overtime at 1.5× above 40 in a workweek.
- Calculate federal withholding from their W-4, plus state withholding.
- Withhold the employee's 7.65% FICA share.
- Add your matching 7.65% employer share.
- Pay the employee and give them a compliant pay stub.
- Deposit the withheld and matched taxes on your assigned schedule.
- Record all of it in a way that survives an audit.
Then every quarter you file Form 941, due the last day of the month after the quarter ends, plus your state’s equivalent. Once a year you file Form 940 for FUTA, and send W-2s to both your employee and the Social Security Administration by 31 January.
The deposit schedule is the part that bites
You will be assigned either a monthly or a semi-weekly federal deposit schedule based on your past tax liability. Most first-time employers start monthly, which means the 15th of the following month. Miss it and the penalty ladder is steep for how small the underlying sum usually is.
| How late | Failure-to-deposit penalty |
|---|---|
| 1–5 days | 2% |
| 6–15 days | 5% |
| 16+ days | 10% |
| Still unpaid 10 days after an IRS notice | 15% |
Interest runs on top. This single risk is the honest case for payroll software. What you’re buying is the deadline never being your problem again.
Your three real options
| Approach | Rough cost | Works well when | Falls down when |
|---|---|---|---|
| By hand IRS tables + EFTPS | $0 plus your evenings | One employee, identical hours every week, a no-income-tax state, and you are genuinely organized about deadlines. | Hours vary, someone quits mid-quarter, or you are on a job site on the 15th. |
| Your accountant runs it | ~$75–200/month | You already use them monthly and want one throat to choke. | You need to run an off-cycle check on a Friday afternoon. |
| Full-service payroll software | $55/month for one employee | Hours vary, you want filings automatic, and you would rather spend the evening on estimates. | Your situation is genuinely trivial and the fee buys little. |
When you should not buy payroll software yet
Skip it for now if all of these are true.
- You have exactly one employee on fixed, salaried hours.
- You are in a state with no personal income tax.
- Your accountant already files your quarterlies as part of their fee.
- You have never missed a tax deadline in your life.
That combination is rare, but it is real, and in that case the monthly fee is buying you very little. Run it by hand, put the deposit dates in your phone with two reminders each, and revisit when you hire the second person.
When it is worth paying for
The math flips fast, though. We’d say it’s worth paying for as soon as any one of these is true.
- Hours vary week to week. Which is the normal case in cleaning, landscaping, and every trade with weather or callouts.
- You crossed into a second state. Multi-state withholding by hand is genuinely unpleasant.
- You have two or more employees. The admin barely doubles. The odds of one deadline slipping go up a lot.
- You have already missed a deadline. One 10% penalty usually costs more than a year of software.
What we recommend, and why
For a U.S. home-service business with one to five employees, we point people at Gusto. The reasoning is narrow and specific.
- It files federal and state taxes automatically, including the 941s, the 940, and W-2s in January. That is the deadline risk above, removed.
- Onboarding is built in. The employee completes their own W-4, I-9, and direct deposit details before day one, which removes most of the paperwork section of our onboarding checklist.
- It handles new hire reporting to your state, which is the item owners forget most often.
- Unlimited off-cycle runs matter more than they sound when someone needs a corrected check.
Here’s where it’s the wrong answer. If you want bookkeeping, invoicing, and payroll in one system and you already run QuickBooks, staying inside that ecosystem usually means less friction. And if you are a single-member LLC with no employees taking owner draws, you do not need payroll software at all. What you need is a bookkeeper.
What changes as you grow to five
| Employees | What newly matters |
|---|---|
| 1 | Registrations, deposits, and getting a clean pay stub out. |
| 2–3 | Accurate hours become the bottleneck. Texted times and a spreadsheet start producing disputes, and overtime miscalculation becomes a real liability. |
| 4–5 | Scheduling and time tracking need to feed payroll directly. Re-keying hours from a group chat is where errors enter. |
At three or more field employees, the thing that helps most is getting hours captured properly at the job site in the first place. A better payroll product barely moves the needle. That is a scheduling and time-tracking problem, and it is where a tool like Connecteam starts to earn its place alongside payroll rather than instead of it.
Common questions
Do I need payroll software for one employee?
Not strictly. One salaried employee with steady hours in a state with simple filing is manageable by hand or with an accountant filing quarterly. Payroll software becomes worth it when hours vary week to week, when you would otherwise miss deposit deadlines, or when you value the automatic tax filing more than the monthly fee.
Can I just pay my first hire as a 1099 contractor?
Usually not. If you set their hours, tell them how to do the work, provide the tools, and they work only for you, the IRS and your state will treat them as an employee regardless of what the paperwork says. Misclassification means back taxes, penalties and interest, and states have become aggressive about it in home services. Our 1099 or W-2 risk check walks through the factors that decide it.
What does payroll software actually cost for one employee?
Expect a base fee plus a per-employee fee. Gusto's Simple plan is $49 a month plus $6 per employee, so a single employee costs $55 a month, about $660 a year. Compare that against the penalty for one missed federal deposit, which starts at 2% and rises to 15%. Pricing checked 28 August 2026.
What happens if I miss a payroll tax deposit?
The IRS charges a failure-to-deposit penalty that scales with how late you are. It runs 2% at one to five days, 5% at six to fifteen, 10% after that, and 15% once a notice has gone unanswered. Interest accrues on top. That’s the specific risk payroll software buys down.
Not tax or legal advice
Payroll rules change, penalties are updated, and state requirements vary considerably. Everything here is general information for planning. Confirm specifics with the IRS, your state agency, and a qualified accountant before acting.