The Real Cost of Hiring Employees and Why Business’ Need to Know

Real Cost of Hiring Employees

Negosentro|There’s a big difference between an employee’s wage and what you’ll actually pay for that employee as a business owner. Taxes, insurance, and benefits are all employee-related costs that should be taken into account when calculating for a true labor cost. This will help you more accurately reflect the finances required to fund a project when you’re looking at labor costs as opposed to just employee wages. Here are some things to calculate into your costs aside from just their wages Cost of Hiring Employees. 

Federal Insurance Contributions Act (FICA)

FICA is required to be paid by employers for each employee. This 7.65% rate is a combination of Social Security taxes (6.2%) and Medicare taxes (1.45%). Although the amount paid for the Social Security tax is $8537.40, Medicare taxes do not have a cap and the 1.45% will apply to all wages that are earned by an employee. 

Unemployment Insurance (FUTA & SUTA)

Employers are required to pay for both federal and state unemployment insurance. The FUTA tax rate is 6% of the first $7,000 that your employee earns. So right off the bat, you will pay $420 per employee for FUTA taxes. 

SUTA is calculated a bit differently, however, and can vary from state to state. The range is generally somewhere between 2.7% and 3.4%

General Liability Insurance

General liability insurance is a type of insurance policy that is fairly broad in nature and offers protection from general business risks. This can include someone hurting themselves at your business, you or an employee damaging someone else’s property, someone making a claim against you for reputation damage, and more. Although general liability insurance is not required by law, it is highly recommended and most employers do carry it. 

Since this type of insurance has a cost that is usually linked to the amount of payroll you issue, it can be difficult to calculate into your hourly labor costs. Fortunately, you can find a labor calculator that will do this for you, making the process much easier. 

Workman’s Comp

This insurance is required by the federal government and it is used when an employee hurts themselves on the job. This is extremely important insurance because it pays for things like wage loss, medical expenses, employer liability if necessary, and even death and funeral costs. Not only is it illegal to not carry workman’s comp, but failure to do so can result in some pretty hefty charges. 

Workman’s comp insurance is an amount that, again, varies between states and across industries. In general, however, you’ll end up paying somewhere between $0.12 – $8.99 per $100 that an employee earns on your clock. 

Benefits Packages

Most employers offer some sort of benefits package, even if it’s just basic health insurance. Far and wide, health insurance is the highest cost associated with hiring an employee. In the U.S., employers end up paying about 82% of the total costs for the health insurance packages they offer their employees. This equates to somewhere between $5,000 and $12,000 per year, per employee. Aside from health insurance, many companies also offer dental insurance.which can cost between another $240 and $650 a year per employee.

Life insurance and long term disability insurance are included in most benefit packages as well since they are a popular option. This can easily add another $500 per year to the cost of having your employees work for you. For anyone who wants to offer their employees a retirement option, such as a 401(k), they can expect to pay another 2.5% of their employees’ wages to the yearly cost. 

There is a lot to consider when it comes to calculating your labor costs. After this breakdown, you can see that an employee will often cost you between 1.2 and 1.8 times their wage rate. That means for someone who is hired at a salary of $30,000 per year, you will likely end up paying between $36,000 and $54,000 to have them. Make sure you calculate your labor rates correctly and include those additional costs. 

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