When considering the addition of a new employee, it’s important to understand the true financial impact this decision has on your business. This goes beyond the agreed basic wage or salary and includes several additional costs. Generally, the actual cost of hiring an employee is estimated to be between 1.25 to 1.4 times their salary. So, if you pay someone $35,000 annually, your actual expenses will likely be between $43,750 and $49,000. Some of these additional costs are mandatory, while others are more variable. However, there may be tax savings available to help offset these expenses.
**Mandatory Additional Costs of an Employee**
When you hire an employee, you’ll incur several payroll tax costs:
– **Employer share of FICA:** This includes 7.65% on compensation up to the annual wage base (which was $132,900 in 2019) and an additional 1.45% on compensation above this amount.
– **Federal Unemployment Tax (FUTA):** The FUTA tax rate is 6%, but most employers can claim a FUTA credit of 5.4%, making the effective rate just 0.6%. This translates to approximately $42 per employee.
– **State Unemployment Tax:** This rate varies depending on your state and your claims experience. The more claims made by former employees, the higher your rate will be.
For more detailed information on these costs, you can consult the IRS and your state revenue department.
**Insurance Coverage for Employees:**
You must also consider insurance for your employees, which includes:
– **Workers’ Compensation:** The cost of this insurance varies by state.
– **Other Insurance Needs:** Depending on the nature of your business, you might require additional coverage, such as professional liability insurance or bonds to protect third parties, like customers, from potential damage or theft by employees.
Your insurance agent can help you determine the necessary coverage. The good news is that the costs of payroll taxes and insurance are fully tax-deductible.
**Other Costs of an Employee**
There are additional costs related to employee benefits that you might want or need to offer:
– **Health Insurance:** While only large employers (those with 50 or more full-time equivalent employees) are required to offer health insurance or face penalties, small employers can benefit from a federal tax credit if they choose to cover at least 50% of health insurance costs.
– **Retirement Savings Plans:** Offering plans like 401(k)s is not mandatory but can be an attractive benefit. Be sure to include the cost of employer contributions in your budget.
– **Family and Medical Leave:** Federal law requires unpaid leave for companies with 50 or more employees, but several states have laws that mandate paid leave, with the costs varying between employers and employees through wage withholding.
These are only a few of the employee benefits you may consider. For more information on the tax deductibility and payroll tax exemption of various fringe benefits, refer to IRS Publication 15-B.
Beyond fringe benefits, there are other employment-related costs that can be harder to quantify, such as:
– **Recruitment Costs:** This includes expenses for background checks and drug testing if needed.
– **Training Costs:** Both initial and ongoing training expenses should be considered.
– **Miscellaneous Costs:** Items like uniforms and protective gear, if required for the job.
**Final Thought**
Carefully add up all these costs to determine if your business can afford to hire a new employee. If your business is growing and you need extra help, it may be essential to hire more staff. Knowing the total cost will help you budget effectively and make informed decisions.
