When you think about adding to staff, your mind immediately assumes the financial investment to do so is the cost of basic wage/salary. But the reality of it is that employees financially cost your business typically 1.25 to 1.4 times the salary, depending on other variables. So, if you pay someone a salary of $35,000, your actual costs likely will range from $43,750 to $49,000. Some added employment costs are mandatory, while others are a little harder to pin down.
What are the mandatory costs of an employee?
Hiring an employee means considerable payroll tax costs, including:
Employer share of FICA (7.65% on compensation up to the annual wage base, which is $132,900 in 2019, plus 1.45% on compensation over the annual wage base).
Federal unemployment tax (FUTA) of $42 per employee. The FUTA tax rate is 6%, but most employers can take a FUTA credit of 5.4%, resulting in a mere 0.6%.
State unemployment tax, which varies with your state and your claims experience (the more claims made by former employees for unemployment benefits, the higher your state unemployment tax rate will be).
You can learn more about these costs from the IRS and your state revenue department. This free payroll calculator for every state from OnPay helps, too!
You also need to address insurance coverage for your employees, including:
Workers’ compensation. Costs vary from state to state.
Other insurance that may be needed for the work performed. For example, if you have a professional firm, you may want or be required to pay for professional liability coverage. Similarly, you may need to have a bond, a type of insurance, for an employee to protect a third party (your customer).
Talk with your insurance agent to determine what coverage is needed. While these mandatory added costs can mount up, there’s good news. The costs of payroll taxes and insurance are fully tax deductible operations expenses (opex).
Other costs of an employee:
Think about employee benefits you may want or need to offer an employee. Under federal law, only large employers (those with 50 or more full-time and full-time equivalent employees) must offer health insurance or pay a penalty. However, there is a federal tax credit for small employers that choose to provide at least 50% of the cost of health coverage!
Offering retirement savings plans, such as 401(k) plans, to employees isn’t mandatory under federal law, but employers may choose to do so. The cost of employer contributions needs to be factored into the total wage package.
Federal law requires employers with at least 50 employees to offer unpaid family and medical leave (FMLA). But a number of states have paid leave laws. Some put the cost on employees (through wage withholding), while others require employers to share in the cost. And the District of Columbia puts the entire burden on employers.
The above listed benefits are only some of the employee benefits you can offer. You can learn more about tax deductibility and exemption from payroll taxes for various fringe benefits by working with your local CPA. Want to do a little research before discussing with your CPA? You can find 34 pages of reading in IRS Publication 15-B: Employer's Guide to Fringe Benefits.
In addition to fringe benefits, there are some other employment-related costs that may be difficult to quantify, such as:
The cost of recruitment, including background checks and drug testing where applicable.
The cost of initial and ongoing training.
Miscellaneous items, such as company sponsored attire.
Paid time off (do you need replacement support in their absence?).
Add up the costs to see whether your business can afford to add an employee to your staff. If your business is growing and you need more help, you can’t afford to NOT hire more workers. But knowing the cost will help you budget accordingly.