Employees Cost Much More Than Their Salaries

If you think the cost of a new hire is only their salary, we’ve got news for you! The salary you pay does represent the bulk of the money that flows out of your business bank account every week or two, however there are many more requirements that typically add up to at least another 10-15% of their wages. In this blog post we will go through the direct and indirect costs of hiring an employee and give you a concrete numerical example.

First off, the employee's salary isn't the end of your financial commitment. It's like buying a new car and forgetting about the gas, insurance, and maintenance it'll need over its lifetime. Just like that shiny new car, employees also come with their own set of extra costs - or as the HR pros call it, the ‘employee burden’.

To make things easy to digest, we've broken down the typical costs associated with hiring a new team member. Some are direct costs (you actually see your bank account decline regularly through time directly as a function of the number of employees you hire). Others are indirect costs, those that you likely pay all the time that cover things like the office or the hiring process or the things the workers need to do their job.

Direct costs:

1. Salary: Yes, it's the biggie - the number you agreed on during the job offer.

2. Employer Payroll Taxes: Employers must contribute to FICA (Federal Insurance Contributions Act – aka Social Security) taxes, unemployment insurance, and other joys of the tax code. These taxes are paid every time you issue payroll, not just on April 15.

3. Benefits: Health insurance, retirement plans, and paid leave aren’t just fancy perks - they’re often expected by employees and add to your cost. Many states require family leave insurance, and other laws demand you provide some sort of health benefits if your company is a minimum size.

4. Workers' Compensation Insurance and Business insurance: If an employee gets injured on the job, workers' comp insurance is there to protect both of you. But it doesn't come free. Most states require workman’s comp. In addition, if you work with clients, your clients may require liability insurance as a precursor to sign contracts with you. These costs increase relative to the number of people you employ.

Indirect Costs:

5. Recruitment and Hiring Costs: Don’t forget about the expenses for job postings, interviews, background checks, and onboarding.

6. Training Costs: From learning the coffee machine to mastering job-specific skills, all training takes time and money.

7. Overhead Costs: Your new hire needs a place to work and possibly some “tools” to work with. That office space, computer, and even the coffee they make in the lunchroom - it all adds up.

Here’s an example of what it may cost to hire someone on an annual basis with a $50,000 salary.

Direct:

- Salary: $50,000

- Employer Taxes: $3,825 (7.65% of salary for FICA taxes)

- Benefits: $200-800 monthly $2400-10,000 annual

- Workers' Comp Insurance: $1,250 (2.5% of salary is a rough estimate)

- Family leave insurance 1% of wage, usually shared 50/50 with worker

Indirect:

- Hiring Costs: $1,000 - $4,000 (conservatively estimated)

- Training Costs: $1,000-$4,000 (variable depending on the role)

- Overhead Costs: really depends on office space, computers, tools, etc. At least $3000 if you’re not 100% virtual.

Adding these up, the true cost of your $50,000 salaried employee is more like $57,500 out of your bank account. Add in the insurance and if you must pay health or other benefits, and it’s more like $65,000.

The price tag of a new hire can seem daunting when you look beyond the salary. My rule of thumb is to always budget 15% extra beyond the salary and create a running balance of all the indirect costs to help with budget forecasts for the following 6-12 months. One last thing – firing an employee is costly too. If that fired person files for unemployment insurance, your rates will likely go up the next year and cost you on all your remaining workers! Moral of the story: take hiring seriously, it really impacts your business’ finances.