I have one employee. Do I really need payroll, or can I just pay them?
The short answer is yes, you need proper payroll. Even one employee triggers a full set of legal obligations that don’t go away just because you’re small.
Here’s what having one employee actually requires. You have to withhold federal income tax, Social Security tax at 6.2%, and Medicare tax at 1.45% from every paycheck. If your state has income tax, you withhold that too. Massachusetts does. On top of what you withhold from the employee, you owe a matching 6.2% for Social Security and 1.45% for Medicare. That’s 7.65% of their wages coming out of your pocket, not theirs.
You also owe federal unemployment tax and state unemployment tax. In Massachusetts, you pay into the paid family and medical leave fund and the workforce training fund as well. These are employer-only obligations that exist whether you have one employee or fifty.
Quarterly, you file Form 941 with the IRS reporting the taxes withheld and owed. You file state returns too. By January 31 each year, you have to give your employee a W-2 and file copies with the Social Security Administration. Miss these deadlines and penalties add up quickly.
Some business owners try to avoid all this by paying their worker as a 1099 contractor instead of an employee. This only works if the person is actually a contractor under IRS rules. If they work set hours at your direction, use your tools and equipment, and you control how the work gets done, they’re an employee. Calling them a contractor doesn’t change that.
If the IRS or your state labor department reclassifies a “contractor” as an employee, you owe the back taxes you should have withheld, plus the employer share, plus penalties and interest. You might also face state-level penalties for unemployment insurance and workers’ comp violations. This exposure is real, and it happens to small businesses all the time. Paying someone off the books in cash creates the same problem, plus potential fraud issues.
The good news is you don’t have to figure this out alone. Full-service payroll handles the calculations, tax deposits, quarterly filings, and year-end W-2s so you’re not manually trying to track deposit schedules and form deadlines. For a small business owner focused on running the operation, outsourcing payroll costs far less than the penalties for getting it wrong.
If you’re not sure whether your worker is properly classified or you want help getting payroll set up correctly from the start, that’s worth a conversation. At Smart Outsourced Solutions, we provide bookkeeping and tax services for owner-operated service businesses, and Simona is a CPA and Enrolled Agent who can make sure your payroll and classification are handled right. Getting it right now is much cheaper than fixing it later.
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