When hiring a new employee, all the potential candidate sees is the salary. But for the employer, there’s more to that figure than meets the eye. <\/p>\n\n\n\n
Employees need recruiting, onboarding, and training, among other expenses, and by the time they start producing, they will have cost the employer almost a half year\u2019s salary.<\/p>\n\n\n\n
So, if you\u2019re planning to expand your business and need to hire new staff, it’s essential to know how to calculate the cost of each employee<\/strong>. <\/p>\n\n\n\n Apart from the amount you pay to the employee and government, there are other extra costs like overhead, equipment, training, and so on, for each new hire.<\/p>\n\n\n\n The cost will vary depending on the size and type of business, as well as the level of the employee. So, how much does an employee cost?<\/strong> <\/p>\n\n\n\n In this post, you\u2019ll learn how to determine the cost per employee<\/strong> to help you make better hiring decisions.<\/p>\n\n\n\n The actual<\/em> employee cost is their total compensation, plus benefits package, taxes, and any additional expenses your business accrues from the hiring process. <\/p>\n\n\n\n The cost differs from one industry to another, but in most cases, it accounts for around 60 percent of expenses.<\/p>\n\n\n\n When it comes to calculating the total cost of an employee, there\u2019s no one-size-fits-all method, because the cost of hiring a software developer<\/a> differs from accountant hiring cost <\/p>\n\n\n\n And with the rise of remote work, it can be quite complicated to know how much work-from-home pay should be.<\/p>\n\n\n\n Joe Hadzima, a senior lecturer at MIT devised a formula that can provide a safe estimate when trying to budget for a new hire. In his opinion, the average total costs for an employee are between 1.25 to 1.4 times the employee\u2019s base salary<\/strong>. This formula is based on the fact that you\u2019ve taken into consideration basic salary, benefits, and taxes.<\/p>\n\n\n\n For instance, say you are employing a new worker with an annual salary of $35,000. According to Hadzima\u2019s formula, the true cost of that new hire will be between $43,750 and $49,000.<\/p>\n\n\n\n If you’re hiring an hourly employee<\/a> earning $20 per hour, their total cost will fall into the $25 to $28 per hour range.<\/p>\n\n\n\n Similarly, CNN reporter Jose Pagliery stated that the real annual cost per employee ends up \u201cbeing 18-26 percent more than a worker\u2019s base salary, and it can be higher for larger companies.\u201d<\/p>\n\n\n\n Using his estimates, an employee with a base salary of $35,000 per year actually costs the employer between $41,000 and $44,100. For an hourly worker earning $20, the real total cost ranges between $23.6 and $25.2 per hour.<\/p>\n\n\n\n This simple formula can be useful for small business owners planning to expand but don\u2019t know how to calculate employee costs. However, you’ll need to know the specifics of the costs you\u2019ll be paying a new employee before bringing them onboard.<\/p>\n\n\n\n Here\u2019s a breakdown of factors that affect employee cost:<\/strong><\/p>\n\n\n\n Before anything else, you must consider the base compensation, the amount of money you\u2019re going to pay your new employee. <\/p>\n\n\n\n It could be a base salary (a standard for exempt employees) or an hourly wage (applicable to non-exempt workers).<\/p>\n\n\n\n Typically, base pay makes up the largest percentage of an employee\u2019s total cost<\/strong>. But other additional factors contribute to high employee costs, and failing to consider them spells trouble for your company\u2019s bottom line.<\/p>\n\n\n\n Recent data by the SHRM on the real cost of recruitment shows that it costs nearly $4700 per hire.<\/p>\n\n\n\n According to Edie Goldberg of E.L. Goldberg and Associates, California-based talent management and development company, most employers estimate the average hiring cost to be three to four times the employee\u2019s salary.<\/p>\n\n\n\n So, if the annual base pay is $35,000, you may spend $105,000 or more to fill that position. But where do these costs come from?<\/p>\n\n\n\n Internal Recruiting Costs:<\/strong><\/p>\n\n\n\n External Recruitment Costs<\/strong><\/p>\n\n\n\n If you opt for external recruiters, you\u2019ll have to pay them a percentage of the new hire\u2019s base compensation as a retainer fee, which can range from 15-30 percent.<\/p>\n\n\n To learn more about “purple squirrels” check out this article: A Purple Squirrel: How to Become the Perfect Job Applicant.<\/a><\/p>\n\n\n\n It takes time and money to hire a new team member. <\/p>\n\n\n\n However, your investment won\u2019t start paying off until they are generating revenue. <\/p>\n\n\n\n You will need to train the new hire in the specifics of their role and will usually be managed by you or another employee.<\/p>\n\n\n\n Typically, it can take up to 12 weeks before they operate at 100 percent productivity. <\/p>\n\n\n\n During this period, the new hire isn\u2019t operating at maximum productivity level and is, in fact, costing the employer between 25-75 percent of the employee\u2019s wages.<\/p>\n\n\n\n With effective employee onboarding and training, you can shorten time-to-productivity<\/strong>. Good onboarding can lower the turnover rate and lengthen a team member\u2019s tenure.<\/p>\n\n\n\n Using onboarding software<\/a> can simplify the onboarding process and help you regulate the onboarding costs.<\/p>\n\n\n\n Regardless of your business type and whether you have in-office or remote teams, you’ll need to empower your employees with certain things so they can perform their roles properly. These include:<\/p>\n\n\n\n If you employ non-exempt workers, and they work for a certain number of hours more than their allotted hours per day, they are eligible for overtime. Unplanned overtime can significantly drive up employee costs<\/strong>, especially if you have a large crew.<\/p>\n\n\n\n You want to keep an eye on it not to go overboard. Consider using a time tracking<\/a> and attendance system to help track overtime costs and effectively manage employee workloads.<\/p>\n\n\n\n All businesses are required by law to pay taxes for their employees. The Internal Revenue Service (IRS) outlines the payroll taxes for employers in detail. Here\u2019s a summary of what you’re required to cover by law:<\/p>\n\n\n\n Businesses must pay Worker\u2019s Compensation insurance, which covers employees who are injured on the job. The funds provide the injured:<\/p>\n\n\n\n Worker\u2019s compensation is regulated by the state, with each job classification being assigned a percentage on each $100 of payroll (salary or hourly wages). Here\u2019s information to give you an idea of how much you can expect to pay in your state.<\/p>\n\n\n\n One effective strategy companies use to attract and retain talent is offering employee benefits and perks. Obviously, these costs add to the overall employee cost. Here are some of them:<\/p>\n\n\n\n Health Insurance<\/strong><\/p>\n\n\n\n Health insurance may be the greatest single expense besides base remuneration. A 2021 report by Kaiser Family Foundation (KFF) shows that small business owners pay an insurance premium of $6,440 for single coverage and $16,253 in premiums for family coverage.<\/p>\n\n\n\n You may opt to provide full premium coverage or a percentage. No matter your choice, it\u2019s not cheap, and any outside help you can get, such as Small Business Health Care Tax Credit can be a lifesaver.<\/p>\n\n\n\n Other employee expenses that will impact employee costs include:<\/p>\n\n\n\n While some of these benefits are voluntary, they play a huge role in attracting and retaining top talent.<\/p>\n\n\n\n You can’t ignore the financial loss caused by employee time theft, which is estimated to cost businesses up to $50 billion annually. <\/p>\n\n\n\n This crime can be carried out in various forms, including buddy punching and early punch in or late punch out.<\/p>\n\n\n\n A reliable time tracking tool like Traqq can help curb cases of <\/strong>employee time theft<\/strong><\/a> by automatically capturing clock in and clock out times.<\/p>\n\n\n\n With that in mind, certain variables impact employee costs and must be considered before calculating the total cost of an employee. These include:<\/p>\n\n\n\n Now that you understand all the factors and variables that impact employee cost, you must be wondering how to arrive at the real cost of your employee.<\/p>\n\n\n\n So, to calculate the final cost of an employee, you will need to add together:<\/p>\n\n\n\n Here\u2019s an example of the actual employee cost for Sam, who\u2019s earning $35,000, and Joyce earning $60,000 per year.<\/p>\n\n\n\n From this example, on paper, it appears as if you’re paying Sam $30,000 and Joyce $60,000. But in reality, you’re spending $8,057 more on Sam and $14,224 more on Joyce.<\/p>\n\n\n\n Here\u2019s another example of an hourly employee earning $16 per hour. Assuming the employee works 40 hours a week, for 50 weeks, the total worked hours will be 2,000:<\/p>\n\n\n\n 40 hours per week x 50 weeks per year = 2000 hours<\/p>\n\n\n\n Next, we\u2019ll need to find the employee labor cost by multiplying the hourly rate by the total hours worked in a year:<\/p>\n\n\n\n $16 x 2,000 = $32, 000<\/p>\n\n\n\n The real employee cost for this employee will be:<\/p>\n\n\n\n The total employee cost for the hourly employee is the sum of the annual labor cost ($32,000) and total annual expenses ($8,312.8), which is $40,321.8.<\/p>\n\n\n\n Therefore, the real employee cost for the worker will be:<\/p>\n\n\n\n $40,321.8 \/ 2000 hours = 20.16 per hour.<\/p>\n\n\n\n Accurately calculating your employee cost is not only a great hiring practice, it\u2019s a crucial budgeting process<\/strong>. <\/p>\n\n\n\n It gives you an accurate figure of how much each employee costs, allowing you to effectively monitor the costs and profitability of projects.<\/p>\n\n\n\n Additionally, you can budget, analyze, and track projects more effectively<\/strong>. <\/p>\n\n\n\n With such data, you can avoid going over budget and risk going bankrupt. <\/p>\n\n\n\n It also gives you insights into the various strategies you can implement to retain talent.<\/p>\n\n\n\n You can employ various tactics to cut down employee costs while ensuring you maintain a strong work culture:<\/p>\n\n\n\n As your business grows, you can\u2019t afford NOT to add one or more employees to your team. <\/p>\n\n\n\n Knowing how much an employee costs will help you budget accordingly and determine if you can afford an extra team member.<\/p>\n\n\n\n A time tracker like Traqq<\/a> can ensure that you accurately track employee work hours and monitor performance and productivity levels. <\/p>\n\n\n\tHow to Determine Employee Cost<\/strong><\/h2>\n\n\n\n
Base Compensation<\/strong><\/h3>\n\n\n\n
Employee Recruitment and Hiring<\/strong><\/h3>\n\n\n\n
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Onboarding and Training<\/strong><\/h3>\n\n\n\n
Overhead<\/strong><\/h3>\n\n\n\n
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Overtime<\/strong><\/h3>\n\n\n\n
Payroll Taxes and Insurance<\/strong><\/h3>\n\n\n\n
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Worker\u2019s Compensation Insurance<\/strong><\/h3>\n\n\n\n
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Employee Benefits and Perks<\/strong><\/h3>\n\n\n\n
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Employee Time Theft<\/strong><\/h3>\n\n\n\n
Variables That Impact Total Employee Costs<\/strong><\/h2>\n\n\n\n
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How to Calculate the True Cost of an Employee<\/strong><\/h2>\n\n\n\n
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Annual Employee Cost<\/strong><\/td> % Of base salary<\/strong><\/td> Sam<\/strong><\/td> Joyce<\/strong><\/td><\/tr> Base compensation<\/strong><\/td> <\/td> $30,000<\/td> $60,000<\/td><\/tr> Total mandatory expenses<\/strong><\/td> <\/td> <\/td> <\/td><\/tr> FICA social security<\/td> 6.20%<\/td> $1,860<\/td> $3,720<\/td><\/tr> FICA Medicare<\/td> 1.45%<\/td> $435<\/td> $870<\/td><\/tr> FUTA<\/td> 6% of the first $7,000<\/td> $420<\/td> $420<\/td><\/tr> SUTA<\/td> 2.7%<\/td> $810<\/td> $1,620<\/td><\/tr> Worker\u2019s comp<\/td> $0.74 for each $100 of base pay<\/td> $222<\/td> $444<\/td><\/tr> Non-mandatory expenses<\/strong><\/td> <\/td> <\/td> <\/td><\/tr> 401(k) plan<\/td> 2.5%<\/td> $750<\/td> $1,500<\/td><\/tr> Life Insurance<\/td> <\/td> $60<\/td> $150<\/td><\/tr> Health insurance<\/td> <\/td> $3,500<\/td> $5,500<\/td><\/tr> Total Employee Cost<\/strong><\/td> <\/td> $38,057<\/strong><\/td> $74,224<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Employee cost of labor<\/strong><\/td> % Of annual labor cost<\/strong><\/td> Total<\/strong><\/td><\/tr> $32,000<\/strong><\/td> FICA tax (7.6%)<\/td> $2,432<\/td><\/tr> $32,000<\/strong><\/td> FUTA tax (6% of the first $7,000<\/td> $420<\/td><\/tr> $32,000<\/strong><\/td> SUTA tax (2.7%)<\/td> $864<\/td><\/tr> $32,000<\/strong><\/td> Worker\u2019s comp ($0.74 for each $100 of wages<\/td> $236.8<\/td><\/tr> $32,000<\/strong><\/td> 2.5%<\/td> $800<\/td><\/tr> <\/strong><\/td> Life Insurance<\/td> $60<\/td><\/tr> <\/strong><\/td> Health Insurance<\/td> $3,500<\/td><\/tr> Total Employee Cost<\/strong><\/td> <\/td> $40,321.8<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Why Understanding Employee Costs Is Crucial for Your Business<\/strong><\/h2>\n\n\n\n
How to Reduce Employee Cost<\/strong><\/h2>\n\n\n\n
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Use Traqq to Keep Employee Costs Down<\/strong><\/h2>\n\n\n\n