Picture this. You own a small business and have 10 employees. If each employee is paid $10 an hour and works 40 hours a week, then your total employee cost is $400 a week, right? Oh, if it was only that simple. When you calculate how much an employee costs a business, there is so much more to the equation than just his hourly pay rate times hours worked.
For starters, and possibly one of the most important items that must be added into the total employee cost is payroll taxes. Yes, you pay the employee a set dollar amount, and when calculating the employee’s paycheck for the week, withhold the amount of employee taxes required by the IRS. However, there are certain required taxes that the employer must also pay on behalf of the employee. Employers must also pay 6.2% of an employee’s earnings to OASDI (Old Age, Survivors, and Disability Insurance), formerly known as Social Security tax, as well as 1.45% to HI (Hospital Insurance), otherwise known as Medicare tax. Go ahead and add that to the total formula for calculating an employees cost.
Some businesses offer employees pension plans. These pension plans may be jointly funded, like a 401K. In this type of plan, the employee contributes a certain percentage of his pay each pay cycle to the plan, and the employer would match up to a certain percentage of employee contributions. On the other hand, the plan may be totally employer provided, like a profit-sharing plan. Whatever is offered, you can be sure that some portion of it will come out of your own pocket. Again, go ahead and add this to the calculation for total employee cost.
Other Employee Benefits
We have mentioned payroll taxes. We have mentioned pension plans. Now is the time to mention a few other employee benefits that increase the bottom line cost of having an employee. Health insurance is a highly sought-after benefit. Sure, the employee pays a percentage of their health insurance cost, but the bulk cost is generally paid by the employer. Cha-ching, cha-ching….do you hear that cost adding up?
We aren’t finished yet. What about paid employee vacation and sick time? How about paid training, travel expenses, meal expenses when traveling? As you see, there are several costs that are associated with an employee, making the overall employee cost much larger than a simple calculation of hours worked times hourly pay rate.
In the end, the cost of having an employee is definitely more than just the weekly pay rate. Employees truly are an investment in your business. However, when you manage to garner a productive, competent, punctual and honest employee, the return on that investment is immeasurable.
If you would like to know more on how to calculate your own total employee cost, please contact us. We would be glad to lead you in the right direction.