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.

About Tim Parker

Tim Parker is the owner of ECS, LLC, a company specializing in financial and small business content. His writing has appeared in many of the top financial blogs including Investopedia, Yahoo! Finance, Benzinga, Business Insider, and Forbes. Find him on Twitter @expositioncreat and Breaking Finance News.com
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17 comments
PatriciaM
PatriciaM

Great information Tim. As a virtual administrative service provider, I find that this is something many business owners do not take into consideration when comparing costs. Also a virtual administrative professional is not a temp agency. We are business owners ourselves. As with an employee you hire, our goal is to form long term relationships that benefit your business.

JamesMax1
JamesMax1

 You ca reduce the costs of employees by outsourcing. For Virtual assistance, secretary service, accounts outsource, dispatch service, customer service, toll free, any sort of inbound calls. You can get all these services under one roof now. And the cost saving factor is incredible.

We are an licensed offshore back office. For information you can e-mail on jamesmax333@gmail.com

Rick
Rick

I am a new ceramic tile contractor looking to hire installers. I've been trying to figure out what percentage of the square foot that I charge that  I can pay the installers and not end up at a loss?

Tom
Tom

I work at home and was thinking of hiring the freelancer that I've been working with full time. does the above apply if they're in a different state then mine? thanks

my blog: http://agymrat.com

worker comp audit
worker comp audit

Hey Tim,

How are you? In many areas we do not pay the perfect payment for our workers. But we should give them exact employee cost because they are in the real danger. One thing more, your information is too good. Thanks buddy.

miahart009
miahart009

My dad has his own music business and he has been thinking about hiring another secretary. I think it is a good idea but it won't be cost effective. He really needs to see the things you pointed out cause I don't think he has fully thought this through. 


Mia |  http://www.brittonsformalwear.com.au 

Easy weddings
Easy weddings

Such a wonderful post as a employee and organization ...

Shopseen
Shopseen

If such a thing exists for your business, then one alternative is to use an application to do the work of an employee. 

Deb
Deb

The cost of employing are certainly on the rise and insurance cost is certainly something to consider and factor in, especially with the changes in healthcare and the dynamic state of it currently.

macculam
macculam

The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

macculam
macculam

An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

GrowthForce
GrowthForce

One thing businesses can do with their current work staff is analyze the cost of their current employees. The data can be used to see if there are opportunities to hire new staff or if the current staff needs to be reorganized or even downsized to make employee costs more efficient.

JRREEDY
JRREEDY

Basic salaries vary all over the place depending on the industry and a variety of other factors.  There are data that can help you calibrate an appropriate base salary.  For example, the Massachusetts Software Council puts out an annual Compensation Survey and there are similar publications in other industries.  Be sure to establish rational salary ranges given your growth plans.  This means that in most cases there should not be great salary differentials between early hires and later employees- any "risk component" of being an early hire should be made up in the equity compensation component.

Medical-ELearning
Medical-ELearning

Should I continue with my business after reading this? Hahaha....discouraging...

Jackbil
Jackbil

 @JRREEDY Indeed the basic salary differ from industry to industry as well as where you are working and seeking for an employee. In India one can get employee at relatively low payment as we have huge population and huge demand for work.

( Jack blogged on http://www.thebeststethoscope.org)

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