Finance Forward Blog

As a small business owner, it is important to understand the true cost of onboarding an employee. While base salary is an important consideration, there are other factors like payroll taxes, health insurance, and other benefits that will significantly increase the total cost of that new employee.

Some of these additional expenses are optional, but many are mandated and must be covered for employees.

Initial Hiring Costs and Base Salary

Hiring Costs

According to Glassdoor, it costs about $4,000 for the average small business to hire a new employee with both resources and time. They also found that it takes about 52 days to fill an open position.

It may not make sense to staff a full-time human resource team as a small business, so often the tasks associated with hiring employees are done by the owners. A study by Entrepreneur found that small business owners spend almost 40% of their time on work like hiring.

Once you have found a candidate you are interested in hiring, it is common practice to run a background check. This will allow you to verify information like education and possible criminal records and can cost between $5 to $80 per applicant.

Base Salary

Perhaps the most obvious cost of bringing on an employee is their base salary. Many factors determine an employee’s base salary including the specific role, location, industry, and demand for those skills in the market.

If someone is highly qualified for a role, they may require a higher base salary than someone who just meets the minimum education and experience requirements.

Onboarding

Even if you find the perfect candidate to work with your small business, they will likely require some training and time to adjust before they can be fully productive. The time it takes to onboard an employee varies on the complexity of the role and the employee's previous experiences.

MIT researchers found that it takes between 8 to 26 weeks for an employee to reach full productivity. To relate this in terms of true costs, an average company will lose anywhere from 1% to 2.5% of total revenues in the time that the new hire is being brought up to speed.

There can be additional onboarding costs as well, such as uniforms or equipment like a laptop or company vehicle. As a CFO or bookkeeper for a small business, it is essential to understand these costs as they can have major impacts on your bottom line.

Mandated Employer Costs

There are several costs that employers must cover for their employees, like payroll taxes and FICA. The good news is that some of these costs are fully deductible for tax purposes.

Small businesses must pay payroll taxes on wages paid to employees, and this cost can be significant.

FICA, which stands for Federal Insurance Contributions Act, must be paid by both the employee and employer. The employer portion is 7.65% of compensation up to the annual wage base of $132,900, plus 1.45% on anything above that. 6.20% of this payment is for Social Security, while the remaining 1.45% is for Medicare.

FUTA, or Federal Unemployment Tax, must be paid at a rate of 6% on the first $7,000 paid to each employee – which amounts to $420 per year. Most employers, however, can claim a tax credit of 5.4% which reduces that number to $42.

State unemployment tax may also be applicable, but these costs vary by state and by your firm’s claim experience. SUTA can range from 2.7% to 3.4%

Worker’s compensation is another mandated cost, and these expenses will also depend on the state you are in and the risk levels associated with the type of job.

Employee Benefits

When trying to attract talented employees your business may also need to consider providing additional employee benefits like a 401(k) plan. The average contribution to an employer-sponsored retirement plan is about 2.5% of the employee’s base salary.

Small businesses with less than 50 full-time employees can receive a federal tax credit if they provide at least 50% of the cost of health insurance. Health insurance is often the largest cost of all employee benefits, and the 2018 KFF/HRET survey showed that small businesses pay about $6,000 per year per employee.

Calculating the True Cost of an Employee

Accurately determining the true cost of bringing on an employee is an essential part of budgeting. If you are an accountant for a small business or own a business yourself, understanding the true cost of hiring will allow you to make better strategic decisions and fully understand what effect hiring has on your bottom line.

Here is an example of how these numbers can look:

Base Salary $50,000

FICA 7.65% $3,825

FUTA $420

SUTA 3% $ 1,500

WC $.10 per $100 $50

401(k) 2.5% $1,250

Health Insurance $6,000

Total Cost $63,045

While you may be hiring someone whose salary is $50,000, the true cost of bringing them on board is over $63,000. This does not even include the cost of office space, laptops, uniforms, or other equipment that you may need to provide to the employee.

A simple way to estimate this cost is to take 1.25 to 1.4 times the base salary. With this example, the real cost of an employee that makes $50,000 is between $62,500 and $70,000 per year.

Have questions about whether your Company can afford to bring on employees? Reach out to the team at J. Hall & Company for help!