Do I need a payroll service if I only have one employee?

The obligations do not scale down

This is the part that surprises people. The requirements attached to a single employee are essentially the requirements attached to twenty, because nothing in the system is indexed to how small you are.

Federal income tax withheld. Social Security and Medicare withheld and matched. Federal unemployment. Rhode Island withholding. Rhode Island unemployment. The state's employee-funded disability deduction. Deposits on a schedule. A federal return every quarter. State returns. A form for the employee at year end, distributed and filed.

All of that applies to a business with one person on the payroll, in the same form and on the same clock.

Nothing in the system is indexed to how small you are.

What a first hire actually requires

1. A federal employer number

   If you do not already have one. Some changes to a business — a change of entity type in particular — call for a new number rather than carrying the old one across, so ask before the change is filed rather than after.

2. The employee's own paperwork

   The withholding form completed by them, so you know what to take off their pay, and the eligibility paperwork completed and kept.

3. State registrations

   Withholding, unemployment, and new-hire reporting. In Rhode Island the employee-funded disability deduction has to be in place from the first cheque, not added once somebody notices.

4. Workers' compensation

   Required of employers with narrow exceptions. Whether yours falls inside one is worth confirming rather than assuming, and the certificate is worth having before the work starts.

5. A deposit schedule

   Set by the size of your payroll rather than chosen by you. Knowing which one you are on is the difference between paying on time and finding out you were not.

Then every cycle

Once those pieces exist, each pay period means working out gross pay, calculating the federal withholding from what the employee put on their form, calculating state withholding, taking the employee's share of Social Security and Medicare, adding your matching share, taking the state disability deduction, and getting the money to them.

Then the deposits go across on their schedule. Then the return goes in each quarter. Then unemployment. Then, early in the following year, the employee form goes out and gets filed.

None of it is hard. All of it is exact, and all of it is on somebody else's timetable.

Where first-time employers go wrong

The three failures are consistent: withholding calculated wrong, a deposit deadline missed, and a quarterly return filed incorrectly. Each carries a penalty, and the deposit one compounds.

What makes the first missed deposit expensive is not usually the penalty itself. It is what follows: a notice, a period of working out what it means, a correction, and often somebody's time to resolve it — which between them cost more than the original amount several times over. And rates and thresholds are reset periodically, so a setup that was correct when it was built quietly stops being correct without anybody touching it.

When it genuinely does not apply

There is one clean exception. A sole proprietor or single-member company with no employees, paying themselves by drawing from the business, does not have payroll in this sense at all — the draw is a movement between accounts, not a wage, and there is no withholding attached to it.

That changes the moment somebody else is paid as an employee. From the first cheque, the whole apparatus above is live, whether the payroll is one person or twenty.

Set it up before payday

The consistent lesson across every first hire is that the work is much smaller in front of the first payday than behind it. Registrations opened before they are needed take an afternoon. Registrations opened after the first cheque has gone out involve amended filings, back deposits and explaining.

If a first hire is coming, say so before it happens. The office answers within one business day.