California is every entrepreneur’s dream state. Bounce around the internet, and you’ll find it at the top of nearly every “Best States for Entrepreneurship” lists. And where you find entrepreneurs, you’ll also find small businesses scrambling to hire new employees.
When you’re an entrepreneur, bringing on a new employee might be one of the biggest (and most daunting!) decisions you make. Beyond the skills stuff, you also have to find out if you can actually afford this person. On top of the employee’s actual salary, you’re also in charge of paying payroll-related taxes.
So how much will a new hire cost in the Golden State? Here’s a handy infographic to help you visualize the estimated cost of hiring an employee in California:
It’s important to remember that there’s more than just the price of that person’s salary or wages to consider. There’s also the cost to recruit, train, and provide benefits that you need to take into account. For now, let’s focus on the bare minimum: your new employee’s wages or salary and the associated taxes that you have to pay as a small business owner.
Let’s expand on each of these so you can get an idea if any of the scenarios are similar to your California business:
- Leo: Leo is a pilates instructor in Santa Cruz and earns $25 an hour. He usually works around 10 hours a week. Leo’s employer pays a smaller amount of wages, $13,000; however, the taxes of $1,450 make up a more significant portion of the total cost to hire than the other examples. Ultimately, the wages make up about 90 percent of the total cost to hire, while the taxes make up about 10 percent.
- Sienna: Sienna is a San Diego-based graphic designer who earns $65,000 a year. Her salary makes up 92 percent of the total cost to hire, while the taxes represent about 8 percent of the total.
- Marisol: Marisol works at a boutique law firm in Los Angeles. She earns $250,000 a year. Her salary makes up around 95 percent of her total cost to hire, while taxes are around 5 percent of the total.
Right away, you’ll probably notice that as the salary or wages goes up, it becomes a higher percentage of the total cost to hire. This happens because most of the taxes have “ceilings,” or max out quickly.
As of September 2018, the Federal Unemployment Tax Act (FUTA), California State Unemployment Insurance (SUI), and California Employment Training Tax (ETT) are only applied to the first $7,000 of an employee’s wages. That means that you’ll have to pay the same taxes for each employee who earns at least $7,000.
The Social Security and Medicare taxes are far more significant. Employers are responsible for 6.2 percent on the first $132,900 of an employee’s wages, up to a maximum of $8,239.80. In contrast, Medicare has no ceiling at all. Employers pay 1.45 percent on all of an employee’s wages.
The main taxes employers have to pay in California.
Just in case you’re not familiar with all the taxes small businesses are on the hook for, here’s a quick look at how the payroll tax rates for California employers break down as of June 2018. Remember that these numbers change, so always check with a tax professional to get the most up-to-date amounts.
- Social Security: Social Security is a federal insurance program that provides benefits to retired employees and the disabled. As noted above, employers must pay 6.2 percent of taxable wages on the first $132,900. In some places, you might see this referred to as “FICA” or the “Federal Insurance Contributions Act,” and that refers to the combination of Social Security and Medicare. Which brings us to our next tax:
- Medicare: Medicare is a federal system of health insurance for people over 65 and younger people with disabilities. Employers must pay 1.45 percent on all of an employee’s wages.
- Federal Unemployment: The Department of Labor oversees state programs that provide unemployment benefits to workers who become unemployed because of an incident out of their control (like a location closing) and meet certain other eligibility requirements. FUTA is 6 percent on the first $7,000 of an employee’s wages. However, most California employers are expected to pay 3 percent in 2019 because they also pay state unemployment, which is worth a 3 percent credit against their FUTA.
- California Unemployment: A state-sponsored insurance program, California provides benefits to unemployed workers, the disabled, and those on paid family leave. California SUTA is 1.5-8.2 percent on the first $7,000 of an employee’s wages. This rate is given to you by the state and can be influenced by how long you’ve been in business, the number of employees you have, the amount of unemployment benefits that have been charged to your account, as well as other factors. Because it varies by company, we’ve used the standard rate that’s assigned to new employers in our calculations above.
- Employment Training Tax: The ETT provides funds to train employees in targeted industries. Employers must pay an extra 0.1 percent on the first $7,000 of wages per year.
Other factors that go into the final cost to hire.
There’s more you may have to pay beyond your employee’s salary and wages and employer taxes. There are also costs that go into recruiting a new employee, like job postings, along with other parts of your compensation package, like health insurance, 401(k) matching, and other benefits.
In a state like California, where competition for talent is especially fierce, lots of variables have to be considered while calculating the total cost of a new employee. But hopefully this breakdown gives you a solid place to start as you build your dream team.