You’ve hired your first person — maybe a part-time assistant, maybe your first real employee instead of a contractor. It feels like a small thing. Surely you can just… pay them? Write a check, send a Venmo, figure out the tax stuff later?
Here’s the catch: the moment you have even one employee, you’re legally required to withhold and pay payroll taxes — federal, often state, sometimes local — on a set schedule. This applies whether you have 1 employee or 100. There’s no “too small to count” exception.
Employee or Contractor? This Matters More Than You’d Think
Before anything else: is this person actually an employee, or are they a contractor? The distinction isn’t about what you call them — it’s about how much control you have over how, when, and where they do the work.
If you’re paying a contractor (someone who sets their own hours, uses their own equipment, and works independently), you generally just issue a 1099 at year-end — no payroll withholding required. If you’re paying an employee (someone whose hours, tools, and methods you control), payroll tax withholding kicks in immediately.
Misclassifying an employee as a contractor to avoid this is a common — and costly — mistake. If you’re unsure which category your new hire falls into, it’s worth a quick conversation with an accountant before your first payment goes out.
What “Payroll Taxes” Actually Means
For a true employee, each pay period you’re responsible for:
- Withholding federal income tax, Social Security, and Medicare from their paycheck
- Matching a portion of Social Security and Medicare as the employer
- Filing quarterly and annual tax forms with the IRS (and often your state)
- Issuing a W-2 at year-end
None of this is optional, and the penalties for getting it wrong — missed deadlines, incorrect withholding — tend to be more expensive than the tools that prevent the mistake in the first place.
Can You Do This Manually?
Technically, yes. Some very small employers calculate withholding by hand using IRS tables, file the paperwork themselves, and get by. If you’re comfortable with tax forms and have the time to stay current on filing deadlines and rate changes, this is possible.
In practice, most people find it’s not worth the risk. Tax rates and thresholds change, filing deadlines are strict, and a single missed or incorrect filing can trigger penalties that cost more than a year of payroll software would have.
Signs You Should Stop Doing This Yourself
- You’ve missed a filing deadline, or aren’t fully sure when they are
- You’re spending real time each pay period on tax calculations instead of your actual work
- You’re not confident your withholding amounts are correct
- You’re planning to hire a second person soon, and want a system in place before it gets more complex
What Payroll Software Actually Does
Payroll software automates the parts that create the most risk: it calculates withholding correctly, pays your employee on schedule, files the required tax forms, and generates the year-end W-2 — all without you needing to track tax-law changes yourself.
For a single employee, this doesn’t require an enterprise-scale system. Several tools are built specifically for very small employers and first-time hirers, with straightforward pricing rather than complex enterprise packages.
The Next Question
If you’ve decided a single employee is enough to justify moving off manual calculations, the next question is which payroll tool actually fits a business your size — not the enterprise-tier platforms built for companies scaling past dozens of employees.
Not sure whether your bookkeeping setup can handle this alongside payroll? See our guide: When Should You Stop Using Spreadsheets for Business Accounting?