Are you ready to expand your small business and start hiring employees to help your business grow? Be ready for the expense shock. The new employee you just agreed to pay $15 per hour will probably cost you about $21.
That’s right! Employees are a big investment for any business. It may seem like small change to pay someone $10 or $12 bucks an hour to help you cook your baked goods or assemble your products, but the hidden costs may add up to about 40% above the hourly rate. This extra cost can creep up and surprise many small business owners.
The Cost of Taxes
What are the extra costs? First is the given – employment taxes. Federal IRS code requires that all employees pay 12.4 percent of the first $106,800 as Social Security taxes. Medicare taxes are another 2.9 percent. These are usually split 50/50 between employer and employee. In addition, employers also must pay a 6.2 percent unemployment tax from the first $7,000 in wages.
State taxes vary, but they will add a little more to your employee cost as well. You might find that your state has an unemployment tax in addition to the federal. If your state has an income tax, be prepared to pay a portion of those as well. And don’t forget all those little taxes in your city for school district, sewer improvements, etc.
If you hire full-time employees, you may want to consider providing insurance benefits. Employers usually choose to pay from one-half to all of the insurance premiums for health, life, dental, and disability. Research these costs to find out how much it will affect your employee investment.
While taxes and benefits make up the bulk of extra employee costs, don’t overlook the small “perks.” Little things like paid vacation, free coffee in the break room and donuts every Friday add up too.
The actual costs of hiring an employee are much more than just the hourly wage you set. If you believe you are ready for employees, be sure your business and marketing plans include the extra sales you will need in order to afford employees. In addition, be prepared to keep accurate payroll and tax withholding records for your tax liabilities.