When you bring a new employee on board, you need to consider the total cost of hiring, whether you’re a solopreneur who’s considering hiring some help or you already have a team of employees but need to hire more. Salary is only one component of the cost of expanding your team. Before you post that job opening, budget for these expenses as well.
Overlooked Costs of Hiring an Employee
If you haven’t checked out the job market in a few years, you might be surprised at just how much competition there is to hire top performers. According to the Bureau of Labor Statistics’ October 2018 jobs report, unemployment remains at a multi-decade low of 3.7%. Plus, the average hourly earnings for all employees is up by 3.1% over the past year, meaning employers need to pay higher wages to attract the best candidates.
In this environment, merely finding the right person can be costly. The Society of Human Resource Management’s (SHRM) 2017 Talent Acquisition Benchmarking Report found the average cost to recruit a new employee is a whopping $4,425. That includes third-party agency fees, background checks, and advertising costs.
Of course, your actual costs may be higher or lower depending on whether you fill the position yourself or hire a recruiter. You can cut cost by advertising on free job boards, reviewing applications, pre-screening candidates, and checking resumes on your own. But that work takes up valuable time that may be better spent elsewhere in your business.
2. Pre-Employment Screening
Screening potential employees is a crucial part of making your final hiring decision. A thorough background check helps you identify quality talent while flagging issues that could cost your business money or its reputation.
Of course, pre-employment screening isn’t free. The SHRM included it in their $4,425 figure, but if you’re handling recruitment yourself instead of hiring an agency, you need to know how these costs stack up on their own.
Employment screening company Trusted Employees provides the following price ranges for commonly requested background checks:
- Criminal Background Check: $5 – $20
- Motor Vehicle Record Check: $3 – $10
- Education Verification: $7 – $15
- Employment Verification: $7 – $15
- Professional License Checks: $7 – $15
- Credit Report: $5 – $12
3. Onboarding & Training
When you hire someone new, they’re rarely fully productive on their first day of work. It can take a new employee quite a while to get comfortable in their role and achieve full productivity.
A study from Mellon Financial Corp. found that it takes an average of 8 to 20 weeks for new hires to reach full productivity. And while you’re working on onboarding and training a new employee, your productivity suffers too. The same study estimated that loss of productivity costs between 1% and 2.5% of total revenues.
According to Training magazine’s 2017 Training Industry Report, on average, companies spend $1,075 and 47.6 hours per learner, per year on employee training.
4. Travel & Relocation Expenses
What happens when you can’t find the person you need to hire in your geographic location? You might be able to fill the role with a remote worker, but when physical presence is essential, you need to expand your search to include talent currently living and working elsewhere – and that’s expensive.
Relocating an employee can include costs such as:
- Travel costs for in-person interviews and home-finding trips
- Assistance in selling a home and finding a new one
- Moving and transporting household goods
- Temporary housing
- Employment assistance for an accompanying spouse
HR expert Liz Ryan writes in her Forbes column that the minimum acceptable relocation package for new college graduates is a $2,500 one-time bonus. When filling a senior-manager-level role, the costs can go much higher.
5. Payroll Taxes
After salary, one of the most significant costs of bringing on a new employee is payroll taxes.
The U.S. federal payroll tax, also known as FICA, includes Social Security and Medicare taxes paid by employers. Currently, the FICA tax rate for employers is 6.2% of wages for Social Security and 1.45% for Medicare.
The Social Security portion of FICA is capped at $132,900 in wages for 2019 – up from $128,400 in 2018. This is the Social Security wage base, and it’s adjusted annually for inflation. There is no cap on wages subject to the Medicare portion of FICA.
In addition to FICA, employers are responsible for paying federal and state unemployment taxes. The current federal unemployment tax (FUTA) rate is 6% of the first $7,000 of wages paid to an employee. However, employers receive a maximum credit of 5.4% when they file their federal unemployment tax return on Form 940. With a maximum credit, the FUTA tax rate is just 0.6%, or $42 per employee, per year.
State unemployment tax (SUTA) rates vary by state; ADP maintains a database of payroll tax rates by state, where you can find detailed rates and other information for your area.
Will you offer benefits to your new employee? Some small businesses can’t afford to offer benefits, but if you don’t, you could be missing out on top talent. According to Glassdoor, nearly 57% of U.S. job candidates report benefits and perks are among their top considerations when accepting a job offer. Among the 54 benefits listed in Glassdoor’s survey, the three employees value most are health insurance, vacation or paid time off, and retirement planning options like 401ks and pensions.
The cost of offering employee benefits varies widely depending on the types of benefits offered and the employer’s level of contribution to things like health insurance premiums and retirement accounts. Human resources and payroll service company Paycor estimates the cost of employee benefits to run up to 30% of overall labor costs.
7. Workers Compensation
Workers compensation is a state-regulated insurance system that pays medical bills and lost wages to employees who are injured on the job or develop work-related illnesses and diseases. Nearly every state in America requires employers with one or more employees to carry workers compensation insurance. If you skip this coverage and an employee gets ill or injured on the job, you could face criminal charges and even jail time.
Rates vary by industry and location. According to the online insurance agency Insureon, workers compensation cost averages range from $0.75 in Texas to $2.74 in Alaska per $100 in employee wages. But those figures include all types of roles. Jobs that put employees at a higher risk of injury or illness, such as construction or mining, receive higher rates than relatively low-risk professions such as office work.
8. Payroll Processing
When you hire your first employee, you need to start calculating, withholding, and remitting payroll taxes and issuing paychecks. It’s a complicated and time-consuming process, which is why many small business owners choose to outsource this work to a payroll service.
According to the online payroll company SurePayroll, the actual cost of outsourcing payroll depends on a number of factors, including:
- How often employees are paid
- The total number of employees
- Whether or not the employer requires direct deposit
- How many employees reside in more than one state
- The need for additional tax filing services
They estimate the cost of outsourcing payroll services to run anywhere from $20 to $100 per month, an additional $1.50 to $5 per payroll run for each employee.
9. Office Space & Equipment
Where will your new employee work? Depending on the type of work they’ll be doing, you may need to provide office space for them to do it.
These costs are tough to estimate since the cost of office rent can vary widely depending on location, office size, and amenities. According to a market research report from CBRE Group, Inc., in a high-cost area like San Francisco, leasing an office space runs, on average, $73.39 per square foot. In a lower-cost city like Albuquerque, office space averages $15.59 per square foot.
You also need to outfit the office with a desk, chair, computer, phone, and other equipment and supplies. Again, the final cost depends on the size of the space you need to fill and the quality of the furnishings you purchase. Entrepreneur David Cummings estimates the cost of equipping an office at approximately $4,200 per person for mid- to high-end furnishings, including an open workspace, Herman Miller chair, and MacBook Air. Of course, budget-minded business owners can probably reduce their costs significantly by purchasing used office furniture and refurbished equipment.
One more thing: Don’t think you can avoid these costs entirely by having your employee work out of a home office. While you can avoid overhead costs such as office rent and utilities, more employers today are reimbursing employees for some of their home office expenses. In some states, it’s mandatory. For example, in California, employers must either provide remote employees with the tools necessary to perform their work or reimburse them for these tools.
10. Software Licensing
Is any of the software you use in your business on a pay-per-user or pay-per-device license? If your new employee needs to use that software, you’ll need to account for the cost of adding a new user or device to your license.
Many business owners don’t consider software licensing compliance until it’s too late. Some software vendors today earn a substantial portion of their revenues from penalties and sales resulting from license compliance audits. The cost of adding a new license will vary depending on the programs you use and your licensing agreement, so review your contracts or talk to your solution providers to get an estimate of how much this will cost you.
11. Other Perks
Google is famous for providing over-the-top perks for employees, including an on-site gym and free workout classes, free massages, and shuttles to and from work every day.
Your small business budget may not allow you to splurge on hefty bonuses, catered lunches, or gym memberships, but don’t overlook the little perks such as free coffee and snacks, team-building events, or an occasional gift card to thank someone for a job well done. These benefits may not cost a lot individually, but they can add up over time.
As you can see, the real cost of hiring an employee is difficult to calculate. Budgeting for and negotiating a salary is easy; it’s the non-wage costs that are often elusive.
But don’t let these numbers dissuade you from expanding your team when the time is right. There are only so many hours in the day. To grow your business, at some point, you need to get the right team in place and start delegating tasks.
The investment in hiring a new employee is significant, but if you hire someone who becomes a valued member of your team and helps your business reach new levels of success, the potential return makes that investment worthwhile.
Have you hired an employee? What expenses of expanding your team caught you off guard?