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Any start-up or new business has a million different factors to juggle and consider. All too often, small businesses fall into difficult situations due to a lack of consideration and planning. This can make or break a new business; planning for every potential scenario and burden is crucial to success.
One of the biggest financial hurdles for new and small businesses that need a viable workforce is the cost of maintaining employees. While it can be all too easy to look at base wages and salary, there are many other indirect and/or hidden costs you’ll need to consider.
Today, we’ll look at the true cost of hiring employees and help you determine whether you can justify the expenses.
FICA Taxes
One of the biggest costs associated with hiring an employee – besides the wages themselves – are FICA taxes. This is an unavoidable reality for almost every business and is equivalent to approximately 7.7% of each employee’s wage (each employee also pays an additional 7.7% out of his or her pay check). This tax is collected in two parts: 6.2% from both employee and employer go to Social Security, and the remaining 1.45% from each go to Medicare.
Senator Mike Crapo once remarked that “even with multiple instruction books, maneuvering the maze of the tax code is costly and time-consuming”. While the FICA tax may be simple enough to understand, it is but one of many taxes associated with hiring employees.
Insurance
Most businesses that want to compete for the best and brightest in the workforce offer a variety of perks to lure employees to them. Most commonly, this comes in the form of health insurance. While most people who enjoy employer-sponsored healthcare insurance never discover the true cost of the plan, employers certainly realize how expensive healthcare can be.
In some cases, the contributions of an employer to an employee healthcare plan can be as large as $10,000 per person. This may be equivalent to one-fourth or more of the wages you’re providing the to the employee and is hands-down the biggest single perk/additional cost provided to employees.
Time Off
Whether you provide paid leave or not, most businesses ultimately pay for time off taken by employees in one way or another. Around 5% of the true cost of an employee can come in the form of sick leave, paid vacation or lost efficiency due to the employee’s absence. While not directly predictable in its entirety, employers must be prepared to carry the burden of this cost ahead of time.
Management, Equipment and Workspace
Even if you have insurance costs, time off and FICA taxes all considered, employees often generate thousands of dollars more in additional annual costs through basic needs. Company management of employees – such as via HR employees – adds significantly to the true cost of employment. In addition, furnishing the equipment and workspace necessary for employees to do their jobs can add a couple of thousand dollars every year in real employee costs.
While the salary of an employee is the bulk (around two-thirds) of the total cost of employment, many new businesses can be caught off-guard by not being prepared for other expenditures. Through a combination of employer-sponsored taxes, healthcare plans, inefficiency and simple management costs, expect to pay much more for each employee than the simple “sticker price” included in an employment offer.
