Is it time to spread your wings from solopreneur to employer? Before you make the transformation, tally up these hiring costs.
Flying solo in business is a great ride. You call all the shots, do all the work to your precise specifications and get all the glory—and the earnings.
But if you’ve got your sights on building your business into something grander in scale, you’re going to need hired help. Whether you’re looking for an assistant to take on administrative tasks, a salesperson to bring in more great gigs or a professional with similar talents so you can work in tandem, it’s important to account for the hiring costs that come with bringing on an employee.
According to Glassdoor, the average U.S. employer spends about $4,000 and 24 days to simply hire a new worker.
Hiring Cost #1: Recruitment
Sure, you can put an ad on an employment search engine or spread the word via social media that you’re looking for an employee. But if you really want to find a person with the right qualifications and the right fit for your small business, it’s helpful to consult a professional recruiter.
The upside of this decision is that the recruiter will handle much of the time-consuming legwork that goes into hiring, including advertising the job, reviewing resumes, pre-screening candidates and checking references. The downside? It won’t be cheap. You can expect to pay anywhere from 15 to 20% of the employee’s annual salary to the recruiter. Yikes.
Hiring Cost #2: Pre-Employment Screening
Whether you outsource recruitment or do it yourself, eventually you’ll narrow the field down to a handful of potential candidates. At this point, you may choose to perform background checks, screenings and other pre-employment tests on potential hires.
Verifirst, a company that provides background screening services for employers, provides the following price ranges for commonly requested background checks:
- Identity verification: $2-$4
- Criminal background checks: $7-$20
- Credit history report: $5-$10
- Motor vehicle record: $3-$10
- Education, employment history, or professional license verification: $7-$15
- Drug testing: $25-$50
Hiring Cost #3: Payroll Taxes
One of the most significant hiring costs after salary is payroll taxes. For 2020, the FICA tax rate for employers is 7.65% including 6.2% for Social Security and 1.45% for Medicare.
The maximum amount of compensation subject to the 6.2% Social Security tax is adjusted annually for inflation. This is known as the social security wage base, and for 2020 the maximum is $137,700, up from $132,900 in 2019. There is no salary cap for Medicare taxes.
In addition to FICA taxes, employers are required to pay federal (FUTA) and state (SUTA) unemployment taxes. The current FUTA tax rate is 6% of the first $7,000 of wages you pay to an employee. However, employers typically receive a credit of 5.4% when they file Form 940, reducing the FUTA tax rate to 0.6%, or $42 per employer, per year.
SUTA tax rates vary by state. ADP maintains an updated database of payroll tax rates by state where you can find detailed information for your area.
Hiring Cost #4: Employee Benefits
Depending on your level of contribution to an employee’s benefits, the human resources and payroll service company Paycor estimates the cost of employee benefits can run anywhere from 20% to 40% of gross salary. That’s a pretty significant expense over and above salary.
A survey by the Kaiser Family Foundation, a nonprofit health policy research organization, found that annual premiums for employer-sponsored family health coverage reached $20,576 in 2019, up 5% from 2018. Workers typically pay an average of $6,015 toward the cost of their coverage. More than 57% of small firms and 99% of large firms surveyed offer health benefits to at least some of their workers.
Of course, not all small businesses can afford to offer benefits, and many don’t. But failing to provide employee benefits can make it harder to hire the best employees. According to Harvard Business Review, health, dental and vision insurance are some of the most essential benefits employees consider when choosing a job.
In fact, 88% of employees in the study cited in the report said they would consider those benefits when selecting between a high-paying job and a lower-paying job with better benefits. Beyond health, dental and vision insurance, some employers also offer disability and life insurance benefits, retirement plans, bonuses, profit sharing and stock options.
Hiring Cost #5: Workers’ Compensation
Depending on the laws in your state, you may be required to carry workers’ compensation insurance. Some states (such as Nevada) require an employer to purchase workers’ compensation coverage with their very first hire.
In other states (such as Texas), purchasing coverage is optional no matter how many employees you have, unless you contract with governmental entities. Insureon, an online brokerage for small business insurance, maintains a database of the rules for each state.
Rates vary by state and by type of work. According to the National Academy of Social Insurance, workers’ compensation costs an average of $1.32 per $100 in employee wages, but actual rates can vary widely depending on the employee’s role. Employees whose jobs put them at greater risk of injury or illness, such as construction, pay higher rates than relatively safe professions such as sales and office work.
Hiring Cost #5: Payroll Processing
Hiring employees means calculating, withholding and remitting payroll taxes as well as issuing paychecks to employees. This process can be complicated and time-consuming, so most business owners opt to outsource this work to a third-party payroll provider.
The cost of outsourcing payroll depends on the level of service provided, the company’s experience and other factors. According to Thumbtack, professional payroll processing costs $70 to $130 per month, although that figure can be higher or lower depending on the number of employees.
The good news is if you’re using a cloud accounting solution, there are add-on payroll services you can include for a more seamless experience.
Hiring Cost #6: Office Space, Tools of the Trade and Cloud Services
Depending on the type of work your employee will be doing and where they’ll be doing it, you may need to provide an office space, computer, phone, and other equipment and supplies.
Hiring costs can vary widely depending on your location, and the amount of space and equipment your employee will need to do the job, so it’s crucial to consider those costs before you hire.
Aside from the physical supplies, there are also shared cloud services you’ll need to provide to your staff member. Whether it’s for tracking time, sending invoices or managing projects, there may be an additional cost to add a new team member to the platform.
Hiring Cost #7: Onboarding and Training
It can take up to a month before a new hire starts to pay for themselves with productivity. They will often need to be trained and establish themselves in their new role before they switch into high gear.
Some research suggests that it can take eight to 26 weeks for an employee to achieve full productivity! And a 2019 Training Magazine study found that companies spent an average of over $1,286 annually on training per employee. Of course, the more complex the job, the longer it takes to get up to speed. And you may need to provide external training courses or certifications to help your employee prepare for their work. You can reduce the cost of deadweight on the payroll by being specific and efficient in your training processes.
Hiring Cost #8: Miscellaneous Fees
You may need to be creative and generous to unearth the perfect addition to your team. Here are a few tactics that could cost you in dollars, but offer you a windfall in value:
- Employee referral bonuses. Not applicable for a first hire, but a great idea if you ultimately end up with staff bristling with amazing industry contacts. The bonus may take the form of cash ($1,000 to $5,000 is standard) or days off.
- Signing bonuses. If there’s competition for the employee you’re after, you may consider including a signing bonus. Depending on the level of the position, this can be $5,000 to $50,000.
- Employee relocation costs. What do you do when the perfect employee lives two states away? You could sigh and move on, or you could pony up some cash for the cost of moving house. According to Liz Ryan in Forbes, an entry-level position might be offered a $2,500 bonus to cover moving expenses. For senior level professionals, you might consider chipping in for:
- Moving expenses, e.g., packing, moving and storage
- Property transactions, e.g., real estate commission fees and closing costs
- Costs to move a vehicle
- Any cancellation fees, e.g., gym membership and nursery school
Hiring Costs: Best Practices
There are a couple of things you can do to reduce the cost of hiring:
- Experts at Workopolis say hiring costs should equal somewhere between 16 and 20% of the employee’s starting annual salary. The more entry-level the position, the closer to the low end of that range you should target. If you’re looking to hire a number of the same positions at once (e.g., delivery drivers), you can take advantage of some economies of scale since the cost of the process should be the same for one as it is for many.
- If you anticipate hiring on an ongoing basis and you have a popular website, be sure to include a Careers page. It may attract employees on its own, reducing the need for costly recruitment services.
Hiring Costs: The Bottom Line
The real cost of hiring an employee is difficult to calculate. Negotiating salary is easy, but it’s the non-wage hiring costs that are often elusive. And none of the expenses mentioned above take into account the lost productivity while you search for, interview and onboard your new hire.
However, growth may be impossible unless you get the right team in place and start delegating work. The investment in hiring a new employee is significant, but the potential return on an outstanding employee makes that investment worthwhile. Before you take the leap, be sure that you’ve considered (and budgeted for) all of the hidden costs of expanding your team.
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This post was updated in May 2020.