How Much Does an Employee Really Cost?

Considering hiring an employee? It’s going to cost you far more than the salary you agree to pay. In fact, each person you hire could cost you twice that amount — or more.

Beyond a base salary, here are the major expenses that come with each employee.

Taxes

You will pay at least three different taxes. First, you will pay 6.2 percent of each employee’s 12.4 percent social security tax for the first $113,700 of earnings. Second, you are responsible for half of the employee’s 2.9 percent Medicare tax, which applies to all earnings (there is no cap). Finally, you’ll pay unemployment insurance; the standard rate is 0.6 percent for the first $7,000 of earnings, making the yearly payment $42.

In addition, you may have to withhold certain state and local income taxes and purchase worker’s compensation insurance, also. Each state and locality has different requirements.

Some states borrowed from the federal government after depleting their unemployment funds. If a state doesn’t pay its loan back, it becomes a credit reduction state, and employers in these states will pay a higher unemployment tax. Click here to check your state’s current unemployment tax rate.

Benefits

According to the Bureau of Labor Statistics, the average hourly cost for compensating a private sector employee is $30.80, once all employer expenses are added in. Wages and salaries accounted for about 70 percent of the total, while benefits comprised 30 percent. That 30 percent breaks down like this: health insurance (7.7 percent), retirement benefits (3.6 percent), paid leave (6.8 percent), and supplemental pay and other costs (the rest).

Employers are still unsure how the Affordable Care Act will affect their spending on employee benefits. Some are turning to programs similar to health savings accounts, including the Intuit Health Debit Card, as a way to better control insurance costs.

Training and Other Costs

Don’t overlook other expenses associated with hiring employees, which can add up fast. Do you need to supply an office and equipment? What about training?

As Chris Warden, CEO of Spread Effect, an online marketing firm with 15 employees, notes: “At first, we didn’t realize how much time it would take current employees to train new hires, [who] need help with everything from setting up their computer to finding the bathroom. All of these small hidden costs add up.”

The Multiple

Instead of estimating actual costs, some employers apply a standard multiple to an employee’s base salary. “Standard rule of thumb says you pay two times their salary, but the multiple is based on the industry,” Warden says. An engineering firm may apply a multiple closer to three while businesses that only employ part-time workers may be well under two.

To find the exact multiple for your business or industry, add up all the costs associated with hiring an employee and divide by their base salary. If the total costs were $80,000 and the base salary was $50,000, the multiple is 1.6. Use an online calculator to calculate the total cost and add any additional costs specific to your business. Did you have to purchase furniture or computer equipment, for example?

If the total cost of an employee is too high for your business, consider hiring an independent contractor. Providing the person you hire meets the IRS requirements for a contractor, they are responsible for all taxes and withholdings.