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What’s the Real Cost to Hire a New Employee?: Some Considerations Before Hiring

When it comes to running a small business, hiring is almost always a good sign since it often coincides with a company’s expansion and development.

But as economic uncertainty reigns supreme, the decision to bring on another employee is one that should be weighed carefully. 

Hiring Permanent Workers = A Costly Investment with Big Potential Returns

The decision to hire additional employees should be seen as an investment, and just like any other investment, if you do your homework and make the effort, you can reap large returns in the form of an experienced, skilled, and dedicated staff. As I mentioned in a previous post, happy, loyal workers can make a big difference to your bottom line.

That said, each addition to your permanent staff can get pricey; the true cost to hire a new worker goes well beyond his or her rate of pay. Not only is there a variety of fixed expenses, such as federal and state taxes, to worry about, but you must also consider a whole host of “soft” expenses, such as the time and resources needed to train and equip the new hire. This “loaded wage” typically averages around 30% of a worker’s base pay, but can get as high as 40%.

While the U.S. economic recovery continues at a snail’s pace, and crucial legislation remains either deadlocked or ambiguous, for most small business owners the question of whether or not to hire a new employee may be a hard one to answer, and this applies even among those who are in the position to expand. These days, when it comes to the economy, there just many more questions than answers.

What Costs are Involved with Hiring a Permanent Worker…

If you are a small business owner considering whether or not to increase your permanent staff, one of the most important things you can do is to be in touch with the real costs associated with hiring and employing a new worker, which can be made easier with software for human resources. The following is a breakdown of the most significant expenses that may be incurred on top of gross pay:

1. Federal and State Payroll Taxes

Employers are obligated to pay several federal and state payroll taxes:

  • Social Security/FICA Taxes- 6.2% of the employee’s gross pay.
  • Medicare Taxes- 1.45% of gross pay
  • Federal Unemployment Taxes (FUTA)- 6.2% on the first $7,000 earned per employee
  • State Unemployment Taxes (SUTA)- varies by state
  • Workman’s Compensation- required in every state except Texas, obligation ranges between 0.3% to 7.5% of gross pay depending on the job description and industry.

2. Employee Benefits

If you offer a benefits package to your employees, then you need to factor in the costs associated with each. Here are a few typical employee benefits:

  • Health Insurance- According to a recent study by the Kaiser Family Foundation on employer health benefits, the average employer contribution to employee health plans was $4,045 dollars for single coverage, and $9,860 dollars for family coverage.
  • Retirement Savings Plans- Though it may not be in vogue these days as businesses seek ways to cut costs, the 401k is a sought after employer-sponsored retirement account. Some employers offer matching contributions, while others just cover the administration costs.
  • Life Insurance
  • Long Term Disability Insurance
  • Tuition Reimbursement- typically for graduate studies.

3. Hiring and Training Costs

Most small business owners overlook the costs associated with hiring and training new workers. This is mostly due to the fact that these expenses are less tangible. They include the time, lost productivity, and paid wages involved in recruiting, conducting back ground checks and interviews, and training the new employee. You should also keep in mind that it will take time for the new worker to get familiar with his or her job, and in the process mistakes can be made- even costly ones.

4. Additional Space, Equipment, and Supplies

Added to the total cost of an new hire is the cost of ensuring that they have the space, equipment and supplies they need to get their jobs done. Some common examples include: office cubes, office furniture, computers, and uniforms. Moreover, new workers may mean an additional draw on utilities as well as any “free perks” that your business provides, such as coffee or a water cooler.

…And What Are the Benefits of Hiring a Permanent Worker?

It almost goes without saying, that having more hands on board will help you to increase productivity and/or expand what your business has to offer. It also brings in to your business new expertise, skills, talents, and perspectives. With a permanent staff, you may also stand to benefit from higher levels of interest, motivation, and engagement.

Sometimes, however, it is not only more cost-effective, but it is also more appropriate, to hire a temporary or freelance worker to complete the required job. In my next post, I’ll offer some suggestions to help you decide whether the position you need to fill should go to a permanent or temporary employee.

In short, the decision to hire a new employee can often be quite complex- especially in these days of economic insecurity. If you are considering hiring new workers, then you’ll only gain from doing what you can to ensure that your ship can handle more hands on board.

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