What’s The Cost Of Hiring An Employee? An Honest Look At The True Price Of A New Hire

cost of hiring an employee

Thinking of hiring an employee? Adding staff means you’re growing. And that’s a good thing. But if you plan to bring someone on board, you want to make sure it doesn’t break your budget. 

The reality is that salary alone isn’t what you’ll actually pay for a new hire. In fact, you can expect to pay 18% to 26 % more than a worker’s base salary

Complete Payroll Solutions’ HR and Payroll teams help clients every day with everything from recruiting to onboarding employees and can help you understand the true picture of what a worker costs.

In this article, we’ll look at various components of labor expenses:

  • Recruiting
  • Salary
  • Benefits (health, retirement, paid leave, vacation)
  • Training 
  • Payroll Taxes
  • Workers’ Comp
  • Overhead

After reading this article, you’ll have a good idea of what you can really expect to pay for an employee. That way you can decide whether you can afford a new worker.

Recruiting

There’s a lot involved in bringing on a new employee. You’ve got to advertise for the position, run background checks, and expend other resources to find talent. These costs add up quickly. Depending on the role you’re trying to fill and how you handle recruitment, the average US company spends about $4,000 to hire a new worker. If you use an external recruiter, it may cost even more since they may charge you a fee of 20% to 25% of the worker’s starting compensation.

There are however some ways that you can save on recruiting costs:

  • Use HR software that automates some of the tasks and paperwork and reduces the time to hire
  • Post openings on free job boards or lower-cost social media and industry-specific sites
  • Encourage your current employees to refer qualified candidates
  • Make sure your career site is robust and easy to use

Salary

The median income for a full-time wage or salary worker on a weekly basis was $936 in 2020, which translates into a yearly income of approximately $48,672. Obviously, this is a general figure and what constitutes a competitive salary for your business may be very different than a company in another industry.

There are both paid market survey services as well as free resources like the Bureau of Labor Statistics that can help you find a range in your market for various positions. Just remember to plan for increases each year to make sure what you’re paying is on pace with the market. In 2020, even with COVID-19, the average salary increase was 2.3 percent according to SHRM.

In 2020, even with COVID-19, the average salary increase was 2.3 percent according to SHRM.

It’s important to keep in mind, however, that salary is only one part of employee satisfaction. Workers may be willing to sacrifice higher pay in exchange for meaningful workplace benefits. For example, you may be able to save on compensation costs by offering perks that enhance their employees’ lives like telecommuting, flexible schedules, and low-cost lifestyle benefits like discounts at child care providers or gyms. 

Health Benefits

Speaking of benefits, over half of employees have said health insurance is the most important benefit that impacts their job satisfaction. Yet health insurance is also the most expensive component of a benefits package. 

In 2019, the Kaiser Family Foundation found that the average annual premium for employer-sponsored health insurance was $7,188 for individuals and $20,576 for families. Of course, these costs vary depending on what you’re offering and how much you’re contributing to the cost. Most covered workers make a contribution towards the premium, so you’re not paying this whole amount.

If you’re a small employer with less than 50 employees, then offering health-related benefits to your employees is optional. However, there are advantages to providing them even if you don’t have to. Namely, it will help you be more competitive in recruiting – and keeping – talent. That’s because in 2018 medical benefits were offered by:

  • 88% of employers with 500 or more employees
  • 83% of those with 100 to 500 workers
  • 55% of companies with less than 100 employees 

And last year, 20% of employers increased their health-related benefits, regardless of size, according to SHRM.

If you choose to offer health insurance, there are ways to save. Offering a high-deductible health plan or combining it with an HSA can help you reduce premiums. You’ll also want to encourage employees to be proactive about their healthcare and can help by offering things like workplace exercise programs.

Retirement Plan

To further boost your recruitment and retention efforts, there are other benefits you’ll want to consider beyond health coverage like retirement plans. According to SHRM, 93% of employers offer a traditional 401(k).

What will a plan cost you? 

There’s a one-time setup fee that can range from $500 to $3,000 if you don’t already have a plan. Once you do, you’ll pay yearly administration costs. These can be anywhere from $800 to $2,000. And you’ll have a fee per participant of $15 to $60 per year. 

If you decided to offer an optional match, which 74% of companies do, that’s an extra expense. In 2019, the average employer 401(k) match was 4.7% of compensation. 

While a lot of these costs are fixed, the plan design can impact what you’ll pay. And there are other retirement offerings that have lower administration expenses like a Simple IRA.

Training 

Even if someone has the skills to handle the job you’re filling, you’ll still need to invest something in training to get them up and running. And beyond initial job training, you may need to provide continuing education to keep them updated for industry designations. Whether you choose to have other employees on-site to lead the training or you send the new employees to off-site courses, either way, it costs you money.

It’s also important to note that training is one of the top benefits employees want from their employer either to enhance their knowledge, grow in their role, or take on more responsibilities. Since training is an important way to show you’re invested in your staff, you should factor in the cost of ongoing development as well. 

On average, companies in 2019 spent $1,286 per learner on training. You can cut these expenses a bit by developing training materials and using in-house trainers instead of outsourcing it. Also, online solutions can help by reducing travel expenses.

Payroll Taxes

One of the biggest costs you’ll have to pay with a new employee is payroll tax. With each paycheck, you’ll need to pay:

  • FICA, the employer portion of which includes 6.2% of gross wages for Social Security up to the wage base limit, which is $137,700 for 2020, and 1.45% of a worker’s earnings for Medicare with no limit.
  • Federal unemployment tax (FUTA), which is at a rate of 6% for the first $7,000 in wages with a possible credit of up to 5.4% for filing Form 940, making your rate .6% unless you are in a credit reduction state.
  • State unemployment insurance (SUI) tax, which varies by state.
  • Paid Family Medical Leave in some states like Massachusetts, which requires certain employers to pay a share of the contributions

You’ll also have to consider the cost of payroll processing if you don’t handle it in-house, which can range from $150 to $200 per employee per year for outsourcing. 

Workers’ Comp

To protect employees who are sick or injured on the job, in every state except Texas, workers’ compensation insurance is mandatory. The costs for the coverage are based on your industry and the type of work your employees perform. For example, businesses in high-risk industries like construction will pay more than those with office workers. 

In some cases, like Massachusetts, the rates are set by the state. But most states are competitive. That means the workers’ comp carriers file their rates with the state department of insurance or similar agency for approval every year. While it’s worth shopping around in these states, you’ll likely find the costs won’t vary too greatly.

To save, in some states, you may be able to get a discount if you’re a member of a certain industry association. And keeping claims down by having a safe workplace may also lower your rates in the future. Pay-as-you-go policies are another way you can make workers’ comp easier to afford since you’ll be paying for coverage with each payroll based on your actual numbers.

Overhead

When you have someone new join your team, there are certain things they’ll need to get started in the job. Depending on the role, that could mean a computer, software licenses, cell phone, chair, clothing, or other items. 

You’ll also want to consider regular supplies as well as other overhead like IT services, utilities, and office space, which can range from $4,194 per employee in Atlanta to $14,800 in New York every year. 

While you may not be able to reduce many of these expenses since they’re needed in order for an employee to work, it’s at least worth looking at every expense and, as author David Finkel suggests, asking whether eliminating it would cause you to lose business and, if not, then don’t spend the money. 

Can My Business Afford a New Employee?

As you can see, the costs for a new hire may be more than you anticipated. But that doesn’t mean the extra expenses should derail your plans. Hiring is crucial to ensuring the right number and type of employees your company needs to reach its organizational goals. At Complete Payroll Solutions, we help growing companies develop optimal talent strategies that work with any budget. Learn about our HR team’s customized solutions and services and how we can create a staffing plan customized to your needs.

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