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What Is the Real Cost of Having Employees?

Following 2020 and the great resignation, there was a rise in small businesses throughout the U.S. Many people, whether laid off due to the pandemic or ready for a new venture, decided it was time to follow their dream of owning a small business. And according to the Census Bureau, more than 4.4 million new businesses were created in the U.S. during 2020 — the highest total on record.

So what happens when it’s time to expand? Hiring employees is essential for company growth, but many new business owners are unaware of the actual cost of employees.

Do you know the actual cost associated with hiring an employee with a $35,000 salary? The cost of hiring a new employee is much more than their wage. The US Small Business Administration found that the actual cost of hiring an employee typically falls between 1.25 and 1.4 times their salary. So, your $35,000-a-year employee will cost you between $43,750 and $49,000.

Wondering how this breaks down among your employee base? Let’s dig deeper into the numbers to understand the extra costs.

Costs Associated with Employees

Federal Insurance Contributions Act (FICA)

First on the list is FICA, a payroll tax that covers Social Security and Medicare contributions. In 2023, an employer must withhold 6.2% Social Security tax on the first $160,200 of an employee’s wages, plus 1.45% Medicare tax on the first $200,000 and 2.35% Medicare tax for all wages beyond $200,00. 

Based on these rates, for an employee at the $160,200 wage cap, the Social Security tax alone will cost employers almost $10,000 per year. 

Unemployment Insurance (FUTA and SUTA)

Next, employers must pay for the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA). FUTA will cost 6% of taxes on an employee’s first $7,000, while SUTA falls around 3% depending on the state. 

SUTA is a fixed rate for the first three years of a business’s existence, then may flex up or down depending on your unemployment claim history. When you partner with a PEO, your classification falls under the federal ID of your PEO provider, so you assume their SUTA rate. This arrangement is an excellent solution for businesses with a high SUTA due to unemployment claims.  

Workers’ Compensation Insurance

Workers’ compensation insurance is another expense that most employers pay, and like SUTA, it also flexes up or down due to claim history. 

Due to the nature of the coverage, the actual cost will also vary significantly for companies in different industries and with different levels of risk in their daily tasks. For example, a construction company will pay more for their coverage than a clerical office. In general, the higher the risk of injury on the job, the more expensive workers’ compensation will be. 

When businesses join a PEO, the same arrangement applies to their workers’ compensation insurance as their SUTA. So if you’re in a high-risk industry, have a new business, or have a record of high claims, partnering with a PEO can lower your rates.

PEOs can also investigate workers’ compensation claims for legitimacy. It’s a great avenue to understand existing claims and access risk management guidance to avoid future claims. Learn more about how PEOs assist workers’ compensation coverage and risk management here.

Recruitment and Training Costs

Finally, both direct and indirect costs are involved in onboarding new employees. If you lean on outside support to find your next hire, you may pay a percentage of the employee’s salary to a recruiter. HR tech can help lower recruitment and training costs, and many tools offer free job postings. Learn more about Talent Management Software and other HR tech functions in this guide

Once the employee begins work, there will likely be equipment costs, formal training costs (like courses or certification), plus the indirect cost of lost productivity for the new hire and anyone involved in their training. In addition, it takes time for new team members to reach their maximum output, and during that transition period, they’ll likely accomplish less than their predecessors. 

These costs will also vary widely depending on how much training is required, how many team members are losing time to bring a new employee up to speed, and how much new equipment is provided. To streamline the process, you can reduce this production loss by using HR tech by pre-recording training and onboarding videos.  According to Gallup, the cost of replacing an employee ranges from one-half to two times their annual salary, so keep these figures in mind as part of your hiring process.  

Why Classification Matters

Many of the costs above only apply to W2 employees, so it’s essential to make sure you’re classifying your workers correctly. Independent contractors are subject to different rules regarding taxation and additional benefits, but they need to meet the criteria to be classified accordingly. 

It’s easy to misclassify your team members if you’re unfamiliar with the definitions and how they apply to your business. Learn more about the differences and their impact on labor costs in this blog article

How to Lower Your Costs

Merritt Business Solutions can save businesses money on many variable costs, including SUTA (through co-employment), workers’ compensation, and employee benefits. If you’re looking to lower your expenses, improve training and recruitment, and lower employee turnover, we can help!

Contact us today to explore your options with a free consultation.

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