How much does it cost to hire an employee?

Whether it’s your first or your fortieth, hiring a new employee is a big step. But how much does it really cost? It’s more than just their salary. According to the Small Business Administration, the cost of an employees is usually 1.25 to 1.4 times their salary, depending on the benefits you offer and other things. Some of these costs are required, while others may be optional. 

Related: 6 Tips for hiring employees for your small business

Here’s how the true cost of an employee breaks down. 

Payroll tax costs of an employee

The employer’s share of Social Security’s Old Age, Survivors and Disability Insurance (OASDI) is 6.2% for employers, on wages up to $142,800 in 2021. The employee pays the same amount. Wages above the $142,800 threshold are not taxed. 

The FUTA, or Federal Unemployment Tax Act, rate is 6.0% of the first 7% of an employees wages, and is payable by the employer. If you pay your required state unemployment insurance, you get a credit of up to 5.4%, which results in an effective FUTA tax rate of 0.6% on the first $7,000 of earnings, or $42. 

State unemployment tax. This rate varies, depending on your state and on how many unemployment claims your past employees have filed. Your state revenue department and the IRS can provide more specific information on the payroll taxes that apply to you. 

Employee benefits

Many employers offer benefits, such as health insurance, paid vacation or sick time, or life insurance, to their employees. Some employers will cover the entire costs of these benefits, while others will ask the employees to pay part of the cost. 

These benefits serve two purposes to the employer. First, they can make your company a more appealing place to work without you having to pay a larger starting salary. If a qualified candidate has two or more job offers to choose from, they may select the one that offers better benefits. 

The other purpose is to keep your employees healthy and happy. Employees with health insurance coverage may be more likely to go the doctor when they first feel sick, rather than waiting until the problem gets worse. And those who have paid vacation time may take a week off when they start to feel burned out, returning to work refreshed and rejuvenated. 

Insurance

In addition to the health, disability and life insurance you may choose to provide for your employees, there are other kinds of insurance you’ll need. Workers compensation insurance is required in virtually all states. It covers medical costs and lost wages if an employee is injured or becomes ill on the job. It is paid solely by the employer. Your cost for workers compensation coverage will depend on the number of employees you have, the type of work your company does, and your claims history. 

Related: Workers compensation insurance: Who needs it and how does it work?

You should also have general and professional liability insurance, whether you have employees or not. General liability insurance protects you against someone else’s claims of bodily injury or property damage. Professional liability insurance protects you against claims that you were negligent or gave bad advice. The cost of these policies is borne by the employer. 

There are more costs to hiring an employee than salary alone. But the right employee can help you increase your earnings and grow your business.