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How Much Does It Cost to Hire an Employee?

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If you are like most small business owners, you spend up to 40 percent of your working hours on tasks that don’t generate income or that could be done by someone else. Is it time to hire your first, or another, employee so that you can focus your time and energy on growing your business? Can you afford to hire someone? How much does an employee really cost?

How much does it cost to hire an employee?

Although the federal minimum wage currently remains at $7.25 per hour, you will probably have to pay more to hire and retain a qualified employee, particularly if the job requires experience or special skills. How much are other businesses in your community paying employees? The minimum starting wage for workers is $11.00 per hour at Walmart, the nation’s largest private employer. Amazon and Target have raised their starting wages to $15.00 per hour. If you hire a full-time employee at $15.00 per hour, the annualized salary (40 hours per week for 52 weeks) would be $31,200. 

How much does the hiring process cost?

Recruiting, interviewing, checking references and running background checks may cost between $3,000 and $5,000 depending upon the required experience and skills, recruiting methods used (job boards, placement agencies, etc.), length of time to fill position, etc. While this may seem high, hiring the wrong person could be even more costly because of time spent dealing with performance issues, customer complaints and then repeating the process to hire a replacement for the employee who didn’t work out.

What other direct costs are associated with hiring an employee?

Employers must pay 7.65 percent of wages for federal Social Security and Medicare taxes. Based on $31,200, this adds almost $2,400 to the cost of the employee. Employers also must pay Federal Unemployment (FUTA) taxes, but may qualify for a tax credit. In Louisiana, employers pay state unemployment taxes on $7,700  for each employee; tax rates range from 0.09 to 6.2 percent. Louisiana employers must also carry Workers’ Compensation Insurance based on industry and experience (previous claims) rates as well as total payroll costs. A good rule of thumb is to plan for at least $3,000 annually for mandatory taxes and insurance based on $31,200.

Providing group health insurance benefits can add approximately $6,000 (employer’s share of premiums) to the annual cost of an employee. While businesses with less than 50 employees are not required to provide health insurance under the Affordable Care Act, providing insurance benefits is a way to remain competitive in the workplace and to retain employees.

What are the indirect costs associated with hiring an employee?

It can take 8 to 26 weeks for a new employee to achieve full productivity according to research. While this doesn’t add to the direct cost of hiring an employee, it does affect productivity and profitability. Adding a new employee may also require purchasing equipment such as a computer, desk, chair, tools, or other things necessary for the employee to do the job. 

Based on this example, the cost of hiring a full-time employee at $15.00 per hour would be at least $34,200 (salary, payroll taxes and Workers’ Comp), plus recruiting and other indirect costs. Adding group health insurance raises the cost to approximately $40,000 annually.

The bottom line is … it takes money to make money! Hiring an employee can give you, the small business owner, time to focus on growing your business and increasing revenue. With our combination of accounting and human resource services, Next Level Solutions can help you evaluate your business financial statements to decide if it’s time to hire. 

An HR professional can help you with all of your human resource needs. From hiring the right employees, running background checks, creating employee handbooks that include anti-harassment policies and procedures, and so much more, Next Level Solutions can work with you to provide the services that you need to run your business.

For more information about our accounting and human resource services, contact Next Level Solutions at info@nextlevelsol.net or (225) 330-8347.