Are you are considering adding another member to your team? If so, do you think your employee will only cost you the $15/hour you plan to pay? Think again. Most business owners are surprised to learn that on average an employee will actually cost 25%-40% above their wages/salary amount. As you think about hiring your next employee, here are some additional employment costs to keep in mind.
In addition to paying your employee their wages/salary, business owners are also responsible for paying employment taxes. On average, these employment taxes cost employers about 15% of an employee’s wages. Business owners are responsible for paying Social Security, Medicare, Federal & State Unemployment Insurance Tax, Workman’s Compensation Insurance, local payroll taxes, etc. These employment taxes happen to cost the employer about an additional 15% of the employees wages. Therefore, an employee making $15/hour will cost the employer about $17-$18/hour.
**Payroll tax figures subject to change**
Paid Time Off
To be a competitive employer, business owners also have to look at offering their employees paid time off benefits. These benefits can include vacation, sick leave, personal time off, paid holidays, and paid breaks (as required by local & federal employment laws). The cost of these benefits typically depends on the employees’ wages/salary, the size of the business, the company’s geographical location, and the industry standard.
Most employees expect to receive health insurance benefits from their employers. It’s a wonderful benefit to offer employees, but can add a hefty price tag to the employer. Business owners need to consider the monthly premiums paid for their employees’ health insurance benefits. Some employers pay 100% of the monthly premium, while other employers pass along a portion of the cost to the employees. With the new Obamacare laws starting to take effect, these numbers could be even higher for businesses in the future.
Retirement Savings Benefit
Another consideration is whether or not you offer employees retirement savings plans or pensions, such as Simple IRA or 401(k). These retirement benefits are funded by both the employee and the employer. Typically, the employer offers to match the employee’s contribution, up to a certain percentage. On average, the employer contribution costs businesses 3-6% of the employee’s salary/wages. This does not keep in mind the cost of managing the retirement plan.
If that’s not enough, there are also additional overhead costs employers must consider when hiring an employee…
- Work Space – computer, desk, chair, phone line, phone equipment, office space, etc.
- Office Supplies – pens, paper, printer toner, whiteout, post it notes, etc.
- New Hire Training – teach them how to do the job and work expectations.
- Human Resources Department – hire additional employees to handle the hiring & firing, creating employment forms, drafting employment handbooks, and to keep up with the changing employment laws.
- Payroll Processing – hire payroll processor to generate checks, calculate tax deductions, submit payroll tax deposits to government agencies, filing payroll tax forms, W-2’s, direct deposit fees, etc.
- Insurance – Workman’s Comp Insurance, licensing & bonding, and other general business insurance.
- Miscellaneous – uniforms, tools, protective gear, cell phone, computer servers, health club memberships, etc.
With all this in mind, an employee hired at an annual salary of $35,000, will cost the employer at least $45,500, if not more in the additional costs discussed above. Or based on the example above, an employee paid an hourly wage of $15/hour, will cost the employer at least $20/hour, if not more. When you decide to hire an employee, it’s important to keep in mind and budget for these additional hidden costs.
IRS – Publication 15, Employer’s Tax Guide
Michelle Edwards, CPA is the owner of Trailhead Accounting Solutions CPA, LLC, an Erie, CO based CPA firm focused on providing small and mid-sized businesses with day-to-day accounting, bookkeeping, and Virtual CFO solutions. Michelle is a CFO turned consultant who loves working with small businesses and entrepreneurs. When she’s not crunching numbers, she can be found hiking, remote camping, gardening, home brewing, quilting, and hanging out with her family.