The true cost of an employee is significantly higher than just their salary. Even if you don’t offer benefits, there are some taxes and expenses that any business owner must pay for the employees on the payroll. To calculate an employee's total cost, you must include costs such as recruiting and hiring, salary, benefits, administrative expenses, and taxes.
If your small business is looking to increase your workforce, or change the benefits you offer to employees, be sure you know the average cost of your employees, and take a look at how those changes will impact your bottom line.
Recruiting and hiring costs
Hiring new talent is a critical function for any business – hire the right talent and they will help you succeed. Hire the wrong talent and they will drain your bottom line. What can an organization expect to spend on average, when recruiting and hiring new talent? According to Bersin’s 2015 Talent Acquisition Factbook, the average cost per hire in 2014 was $4,000.
Depending on the position, hiring can require highly targeted recruiting which adds to the difficulty and consequently the cost of hiring for specific roles. Also, size of the organization has a significant impact on the cost of hires, according to the Society of Human Resource’s Benchmarking Database, companies with:
- Fewer than 1,000 employees spent an average of $3,079 per hire, and it took 29 days to fill open positions.
- 1,000 or more employees spent an average of $4,285 per hire, and it took 43 days to fill open positions.
If you’re looking for the best place to invest your recruiting budget, the research indicates that company websites create more hires than other sources, followed by job boards, and internal candidates (employees currently working at your company). The recruiting budget spent on professional networking sites increased to 12% on average in 2014 while budget devoted to agencies and third-party recruiters dropped to 18%. With companies taking, on average, 52 days to fill an open position.
Since the industry, the size of the employee population, and geographic region influence recruiting costs, benchmarking is the most practical way for an organization to evaluate the current cost per hire. Do some research on your industry and find out what similarly sized companies are doing for their hiring needs and estimate their costs to see how they compare with yours.
The biggest expense: salary
Salaries vary depending on the industry, geographic location, level, and a variety of other factors. As part of your compensation strategy you should adhere to the salary ranges that are established based on all job descriptions. Additional salary-related costs to consider include any bonuses or commissions for which some employees are eligible.
If you're a startup, you should also factor in the "cost" or opportunity cost of the equity you're offering as well!
The price of benefits
According to the Bureau of Labor Statistics, in March 2016, the average cost for health insurance benefits was $2.44 per hour worked in private industry. Employer costs for health insurance benefits ranged from 89 cents per hour worked for service workers, to $3.81 for management, professional, and related occupations.
Private industry employer costs for paid leave averaged $2.20 per hour worked, while retirement and savings averaged $1.23 per hour worked.
A list of common benefits that you'll have to account for, depending on what you offer:
- Health, dental, and vision insurance
- Worker's compensation
- Flexible Savings Account (FSA)
- Disability insurance
- Commuter benefits
- Relocation expenses
- Life insurance
- Child care subsidies
- Tuition reimbursement
The costs of general services (such as accounting, procurement, property management, HR, etc.) fall under this heading. Administrative expenses also include items such as:
- Business travel
- Technology systems
- Professional organization membership dues
Although many organizations are embracing flexible work options, including the option to work remotely, chances are you need to have some physical space where your employees conduct their work. That includes rent—the rate varies per square foot depending on location, but in general, each employee needs about 175 to 250 square feet for office workspace. In addition to the cost of space, there are costs associated with furnishing the space which can run anywhere from $300 to $10,000 per cube.
The Federal Insurance Contributions Act established tax requirements for Social Security and Medicare contributions: Social Security:
- 12.4 % of earned income must be paid to Social Security—6.2 % paid by the employer and 6.2% paid by the employee.
- Medicare: 2.9 % of earned income must be paid to Medicare—1.45 % paid by the employer and 1.45% paid by the employee.
There are other employee-related taxes for which the company is responsible, including:
- Federal unemployment taxes
- State unemployment taxes
- Worker’s compensation taxes: these are used by the Department of Labor to fund disability compensation programs. The premium rates depend on the category of employee, with higher risk jobs being at a higher rate.
Calculating, withholding, and remitting payroll taxes is complicated, which is why most organizations hire an in-house expert or pay a third-party payroll provider to handle the process.
The lesson here is that when you’re looking at how much an employee costs, it’s not a simple calculation. Being an employer is an expensive part of running a business—the investment you make goes beyond the wage an employee receives. Be sure that you invest wisely by hiring the right employees and communicate to them what you’re paying in addition to their salary so they fully understand how you’re contributing to their personal and professional well-being.
We also recommend reading: 5 Ways to Evaluate Employee Happiness