Every superhero needs a sidekick. And you, my dear entrepreneur friend, might realize that you can’t run your business, take care of your personal needs, and have a thriving social life simultaneously without a little help.
If you’ve decided your business needs additional support, selecting the appropriate pay rate for a new hire is only the first step in determining the funds you’ll need available to grow your team. You’ll have to figure out if you can actually afford the total cost of adding someone to your payroll.
Here’s what you need to consider to determine if you’ve got the money to cover new team members. Plus, this template includes formulas that have already been programmed into the spreadsheet to do the calculations for you:
Free Small Business Hiring Budget Calculator
Monthly Baseline Costs
When hiring, there are a few employee costs that you must pay. If you can’t cover these costs, then you’re not ready to hire.
Gross wages
An employee’s gross wages are the fixed, regular payments you make to your employee. These are your employee’s earnings BEFORE taxes. You can pay your employee two ways:
An hourly wage, or
A base salary
When hiring an hourly employee, keep in mind that you’re subject to federal and state minimum wage laws. If your state minimum wage is higher than the federal wage, you’re required to pay the higher wage. Here’s how to calculate your baseline wages for a semimonthly pay period:
(Number of Hours per Week x 2) x Hourly Rate = Gross Wages Paid
Consider it within the context of an example. Let’s say you own a small floral shop. You hire someone to help out around the shop, working 20 hours a week for $15 an hour. Every two weeks, you pay your employee $600 in wages. In other words, every two weeks, you need to have $600 available for just wages.
(20 x 2) x $15 = $600
On the other hand, salaried employee’s wages are based on the employee’s salary. To calculate how much you’ll need for your semimonthly payroll, you must determine their wages per pay period. To do this, divide the employee’s annual salary by the number of pay periods in the year.
Annual Salary / Number of Pay Periods = Gross Wages Per Payroll
For instance, in the floral shop scenario, if you decide to hire a shop manager as a salaried employee who is paid $30,000 annually on a semimonthly basis (24 pay periods). Every two weeks, you must have $1,250 available for just wages.
$30,000 / 24 = $1,250
Payroll taxes
In addition to paying wages, you’re also required to pay federal and state employer payroll taxesevery single time you run payroll. Employer payroll taxes cover half of your employee’s FICA taxes, including their Social Security and Medicare. The employer’s FICA tax rate is 7.65 percent of the employee’s wages.
In addition to FICA taxes, employers have to pay Federal Unemployment Tax Act (FUTA) taxes, which is 6 percent of each employee’s first $7,000 in wages.
Employers must also pay state unemployment insurance (SUI) and local taxes. Since every state has a different SUI rate, we’re going to focus on calculating your federal employer taxes per pay period.
The formula for federal employer tax is:
Gross Wages x 7.65% = FICA Taxes
Gross Wages (first $7,000) x 6% = FUTA Taxes
FICA Taxes + FUTA Taxes = Federal Payroll Taxes
Let’s go back to the example of the hourly employee at the floral shop. For each payroll period for the first five months (which is how long it will take for the employee to surpass $7,000 in wages), you will need to pay $49.50 in federal payroll taxes. That’s an additional $100 a month!
$600 x 7.65% = $45.90
$600 x 6% = $3.60
$45.90 + 3.60 = $49.50
Payroll service expenses
While it is possible to process payroll manually, most business owners opt for a payroll provider that processes employee’s checks and files state and federal payroll reports and payments. These services are a major time saver—but they also come at a price.
Fees for payroll providers can range from $30 to $100 per month or more, and they are considered part of the baseline costs of hiring an employee.
Adding it up
To recap, these are your monthly baseline costs to hire an employee:
Gross wages
Payroll taxes
Payroll service expenses
To review the floral shop example of hiring a shop hand for 20 hours a week at $15 per hour, your monthly costs will be:
Gross Wages: $1,200
Payroll taxes: $99
Payroll service fee: $45
Total: $1,344
You could use the “Monthly Baseline Expenses” section at the top of the Small Business Hiring Budget Calculator we created for you to calculate the minimum you’ll pay for your employees monthly. Your monthly profits will determine if you can afford to hire.
But keep in mind that this does not reflect the actual cost of hiring. Let’s review some additional costs you’ll need to consider that are also reflected in that employee cost calculator.
Employee Benefits
While no federal law requires employee benefits, doing so can help you attract and retain top talent, especially in a competitive industry.
Also, there’s a tax advantage to offering benefits; you can deduct the cost of your contributions to the employee’s benefits package.
The con of employee benefits is the cost, which is higher when you have just a few employees. Also, you’ll have to set up and manage your employee benefits—unless you decide to let someone handle it for you.
The most common types of employee benefits for full-time employees include:
Dental and vision coverage
Life and disability insurance
Since benefit packages vary in cost, a good way to determine if you can offer benefits is to look at your overall monthly budget for a new employee. If your baseline costs are less than your budget, then you may be able to offer benefits.
Monthly Budget for Employee – Monthly Baseline Costs = Monthly Benefits Budget
For example, your monthly budget for a new hire in the floral shop scenario is $2,000. Your baseline costs are $1,333 monthly. That means you have $667 to put towards employee benefits. Knowing this, you can research benefit packages to see if there’s one that fits in your budget.
Workers’ compensation insurance is another cost you may incur. Workers’ comp laws vary by state, but most states require employers to carry it if they hire employees. Be sure to add all applicable benefits when calculating the cost of an employee.
Other Costs
You should consider more than labor costs when deciding if you can hire. The hiring and onboarding processes can add a substantial amount to the bottom line.
Examples of other overhead costs include:
Recruitment costs
Job posting fees
User licenses for software
Office or meeting space rental
Tools or equipment
Uniforms
Additionally, indirect costs, such as office space, should also be accounted for to reflect the true cost of hiring.
Before You Hire
Before hiring a new employee, you must review your monthly budget and decide how much you can afford to pay for a new employee. You’ll be paying your employees on a regular basis, which means you’ll need ongoing cash flow to meet your payroll expenses(wages, healthcare, etc.). Is your revenue consistent enough to cover the monthly employment costs?
Consider working with an accountant or other advisor to help you decide, especially in the early days of your business.
