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Every superhero needs a sidekick. And you, my dear entrepreneur friend, might be realizing that you can’t run your business, take care of your personal needs, and have a thriving social life all at the same time.
If this sounds like you then it’s time to hire a sidekick. But how do you know if you can really afford to make the hire? Because, unlike Batman and Robin, your sidekick isn’t going to work for free.
Here are all the costs you need to consider when hiring a new employee (and how to tell you’ve got the money to cover them):
Free Small Business Hiring Budget Calculator
Monthly Baseline Costs
When hiring an employee, there are a few costs that you MUST pay. Think of these costs as the bare minimum you’ll be paying for an employee. If you aren’t able to cover these costs, then you’re not ready to make a hire.
By the way, this article assumes that you’ve already determined how much you’re going to pay your new hire. If you’re still crunching those numbers, here’s some friendly advice on how to determine your pay rates.
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, with:
- An hourly wage, or
- A 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 semi-monthly pay period:
|(# of Weekly Hours x 2) x Hourly Rate = Gross Wages Paid|
Let’s look at an example. Aida owns a small floral shop. She hires a shop hand to work 20 hours a week and pays them $15 an hour. Every two weeks she pays her shop hand $600 in wages. In other words, every two weeks she needs to have $600 available for just wages.
|(20 x 2) x $15 = $600|
On the other hand, salaried employee’s wages are based on an annual salary. To calculate how much you’ll need for your semi-monthly 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 / # of Pay Periods = Gross Wages Per Payroll|
For example, Aida decides to hire a shop manager as a salaried employee who is paid $30,000 annually on a semi-monthly basis (24 pay periods). Every two weeks Aida needs to have $1,250 available for just wages.
|$30,000 / 24 = $1,250|
In addition to paying wages, you’re also required to pay federal and state employer payroll taxes every single time you run payroll. Employer payroll taxes cover half of your employee’s FICA taxes, which are their Social Security and Medicare. The employer FICA tax rate is 7.65 percent of the employee’s wages.
In addition to FICA taxes, employers have to pay FUTA taxes, which is 6 percent of each employee’s first $7,000 in wages.
Employers also have to pay state unemployment insurance (SUI) and any 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 Aida’s hourly employee. 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), Aida will 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
Let’s go back to Aida. To hire a shop hand 20 hours a week at $15 per hour, Aida’s monthly costs will be:
- Gross Wages: $1,200
- Payroll taxes: $99
- Payroll service fee: $45
- Total: $1,333
This is the bare minimum Aida will pay for her employee every month.
Can she afford it? It depends on her current profit. If Aida is only profiting $3,000 a month at the moment, then hiring an employee would leave Aida with little money left to pay herself. If her profit is $10,000 a month, then it’s feasible for Aida to hire an employee.
While there’s no federal law that requires you to offer benefits, doing so can help you attract and retain more qualified employees, especially if you’re hiring 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 are:
- Health, dental, and vision insurance
- Life and disability insurance
- Retirement plans
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, Aida’s budget for a new hire is $2,000 a month. Her baseline costs are $1,333 monthly. That means Aida has $667 to put towards employee benefits. Knowing this, Aida can research benefit packages to see if there’s one that fits in her 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.
You may incur other costs not associated with wages, taxes, and benefits, but rather additional expenses from the hiring and onboarding processes.
Some examples of other costs are:
- Recruiting and job posting fees
- User licenses for software
- Office or meeting space rental
- Tools or equipment
For example, Aida’s costs to hire her new shop hand are:
- Job posting fees — $300
- Work apron — $30
- Additional tools — $60
- User license for software — $10 monthly
In total, Aida will pay $390 in one-time costs and $10 in ongoing monthly costs as a result of her new hire.
Before You Hire
Before hiring a new employee it’s crucial that you look at your monthly budget and decide how much you can realistically afford to pay for a new employee. Keep in mind that you’ll be paying your employee on a regular basis, which means you’ll need ongoing cash flow to meet your payroll expenses. Is your revenue consistent enough to cover the monthly cost of an employee?
Don’t commit to hiring an employee until you’re financially ready. If you hire too soon, you may end up taking out loans or foregoing your own pay to cover payroll.
Now that you know the costs of hiring an employee it’s time to find your perfect sidekick! Your own personal Robin is out there waiting for you.
The opinions expressed in this article are those of the author and do not necessarily represent Gusto’s views.
This article provides general information and shouldn’t be construed as financial advice. It’s always best to consult a CPA or financial advisor for advice specific to your business.