Before you put your recruiter hat on and bring talent on board, it’s important to consider the total cost of hiring a new employee.
You’ve flown solo for years (and were really good at it), but you’ve finally reached the point where it’s time to hire help.
Of course, salary is the most obvious cost of hiring, but before you expand your team, arm yourself with the awareness of these expenses too.
Hiring Costs #1: Recruitment (If You Don’t Do It Yourself)
Finding the right person to hire can be costly, not to mention time consuming. You may want to be a stakeholder in the process, but not handle all of it.
Will you advertise the open position yourself? Or enlist the help of a recruiter? Working with a recruiter is expensive. Writing for Forbes, Ken Sundheim of KAS Placement says you can expect to pay anywhere from 15 to 20% of the employee’s annual salary to a recruiter. That adds up to a pretty significant cost, even for an entry-level position.
The upside is that the recruiter will handle much of the time-consuming legwork that goes into hiring, including advertising the job, reviewing resumes, pre-screening candidates and checking references. So before you opt to go the DIY-route, consider the value of your time that will be taken up by those tasks.
Hiring Cost #2: Pre-Employment Screening
It’s the little costs that truly add up! Whether you outsource recruitment or do it yourself, eventually you’ll narrow the field down to a handful of potential candidates. At this point, you may choose to perform background checks, screenings and other pre-employment tests on potential hires.
Verifirst, a company that provides background screening services for employers, provides the following price ranges for commonly requested background checks:
- Identity verification: $2 – $4
- Criminal background checks: $7 – $20
- Credit history report: $5 – $10
- Motor vehicle record: $3 – $10
- Education, employment history, or professional license verification: $7 – $15
- Drug testing: $25 – $50
Hiring Costs #3: Payroll Taxes
One of the most significant costs of hiring an employee after salary is payroll taxes. For 2018, the FICA tax rate for employers is 7.65%, including 6.2% for Social Security and 1.45% for Medicare.
The maximum amount of compensation subject to the 6.2% Social Security tax is adjusted annually for inflation. This is known as the social security wage base, and for 2018 the maximum is $128,700, up from $127,200 in 2017. There is no salary cap for Medicare taxes.
In addition to FICA taxes, employers are required to pay federal (FUTA) and state (SUTA) unemployment taxes. The current FUTA tax rate is 6% of the first $7,000 of wages you pay to an employee. However, employers typically receive a credit of 5.4% when they file Form 940, reducing the FUTA tax rate to 0.6%, or $42 per employer, per year.
SUTA tax rates vary by state. ADP maintains an updated database of payroll tax rates by state where you can find detailed information for your area.
Hiring Costs #4: Employee Benefits
Depending on your level of contribution to an employee’s benefits, the human resources and payroll service company Paycor estimates the cost of employee benefits can run anywhere from 20% to 40% of gross salary. That’s a pretty significant expense over and above salary.
The Kaiser Family Foundation, a nonprofit health policy research organization, health insurance alone costs an average of $6,690 for single coverage, making it the most expensive benefit to provide.
Of course, not all small businesses can afford to offer benefits, and many don’t. But failing to provide employee benefits can make it harder to hire the best employees. According to Harvard Business Review, health, dental and vision insurance are some of the most essential benefits employees consider when choosing a job.
In fact, 88% of employees in the study cited in their report said they would consider those benefits when selecting between a high-paying job and a lower-paying job with better benefits. Beyond health, dental, and vision insurance, some employers also offer disability and life insurance benefits, retirement plans, bonuses, profit sharing, and stock options.
Hiring Costs #5: Workers Compensation
Depending on the laws in your state, you may be required to carry workers compensation insurance. Some states (such as Nevada) require an employer to purchase workers compensation coverage with their very first hire.
In other states (such as Texas), purchasing coverage is optional no matter how many employees you have, unless you contract with governmental entities. Insureon, an online brokerage for small business insurance, maintains a database of the rules for each state.
Rates vary by state and by type of work. According to the National Academy of Social Insurance, workers compensation costs an average of $1.32 per $100 in employee wages, but actual rates can vary widely depending on the employee’s role. Employees whose jobs put them at greater risk of injury or illness, such as construction, pay higher rates than relatively safe professions such as sales and office work.
Hiring Costs #5: Payroll Processing
Hiring employees means calculating, withholding and remitting payroll taxes as well as issuing paychecks to employees. This process can be complicated and time-consuming, so most business owners opt to outsource this work to a third-party payroll provider.
The cost of outsourcing payroll depends on the level of service provided, the company’s experience and other factors. According to Thumbtack, professional payroll processing cost $80 per month on average, although that figure can be higher or lower depending on the number of employees.
The good news is if you’re using a cloud accounting solution, there are add-on payroll services you can include for a more seamless experience.
Hiring Costs #6: Office Space, Tools of the Trade, Cloud Services
Depending on the type of work your employee will be doing and where they’ll be doing it, you may need to provide an office space, computer, phone and other equipment and supplies.
Costs can vary widely depending on your location and the amount of space and equipment your employee will need to do the job, so it’s crucial to consider those costs before you hire.
Aside from the physical supplies, there are also shared cloud services you’ll need to provide to your staff member. Whether it’s for tracking time, sending invoices or managing projects, there may be an additional cost to add a new team member to the platform.
The Bottom Line
As you can see from the data above, the real cost of hiring an employee is difficult to calculate. Negotiating salary is easy, but it’s the non-wage costs that are often elusive. And none of the expenses mentioned above take into account the lost productivity while you search for, interview, and onboard your new hire.
Hopefully, none of this will dissuade you from hiring an employee when the time is right. At some point, growth may be impossible unless you get the right team in place and start delegating work.
The investment in hiring a new employee is significant, but the potential return on an outstanding employee makes that investment worthwhile. Before you draft up that help wanted ad, make sure that you’ve considered (and budgeted for) all of the hidden costs of expanding your team.
about the author
Janet Berry-Johnson is a CPA and a freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Parachute by Mapquest, Capitalist Review, Guyvorce, BonBon Break and Kard Talk. Janet lives in Arizona with her husband and son and their rescue dog, Dexter. Outside of work and family time, she enjoys cooking, reading historical fiction and binge-watching Real Housewives.