Payroll Taxes for One Employee: What a First Hire Costs

What you owe on the first dollar

From the first payroll, an employer owes its half of Social Security and Medicare, federal unemployment tax, and state unemployment tax. The employee's half of Social Security and Medicare, plus income tax withholding, is deducted from their pay — that is their money passing through your account, not a cost to you.

Confusing the two is the most common budgeting mistake with a first hire, and it roughly doubles the apparent tax burden. Your cost is the employer share; the rest is a transfer you administer.

The taxes are front-loaded

Because unemployment taxes stop at low wage ceilings, most of them are paid in the first months of the year. Cash flow in January and February is therefore worse than the annual average suggests, and a business that budgets a flat monthly figure will be short early and flush late.

What has to exist before payday

An employer identification number, which the IRS issues free. A state withholding account and a state unemployment account, both registered with the relevant state agencies. Workers' compensation cover, which is required in nearly every state and priced by what the work involves.

None of these are optional, and the registrations take time — which is why they are worth starting before the offer letter rather than after it.

Common questions

Do I need workers' compensation for one employee?

In nearly every state, yes, and often from the first employee. The rules and the thresholds are state-specific, and the premium depends on the class code for the work rather than on any national rate — which is why no calculator on this site prints a workers' compensation figure.

Can I pay someone as a contractor instead?

Only if the working relationship genuinely is a contractor relationship, which is decided by how the work is controlled and directed rather than by what the contract says or by which option is cheaper. Misclassification is expensive to unwind, and cost is not a defence.

How much should I budget above the salary?

Run your own figures rather than a rule of thumb: employer taxes are a small and fairly predictable share, while benefits and overhead — the parts that vary most between businesses — usually dominate the total.