The True Cost of Hiring Employees

If you want to control expenses and manage your finances responsibly, it’s important to know the true costs of your employees. As they’re such a large part of your cost base, you have to ensure your product and service prices take into account the total money you spend on employees, not just their salaries, in addition to all the other expenses incurred by your business – such as taxes, training, bonuses, and more.

Here’s a breakdown of the main areas that contribute to employee costs.

The True Costs of Hiring

One of the biggest costs is in bringing employees into your business in the first place. Here’s where you’ll incur expenses:

  • Staff Recruitment Agency and HR Time Costs — If you use a recruitment agency, you will need to pay their fees. Your HR staff will need to review and interview applicants, so you’ll need to pay for their time to do so.
  • Advertising costs — Advertising for job roles can be expensive; plan for advertising fees on job portal websites or fees to participate in jobs fairs.
  • Onboarding and Training — It can take time to get a new hire up and running. Figure in the cost of their training, onboarding, and time spent mentoring and teaching them. Other employees or supervisors may not have as much time for their own jobs during the regular workday while training a new hire, so you may want to factor in overtime costs as well.
  • Equipment — You’ll need to pay for hardware, software, and other incidental costs to get the employee up and running. The employee may need a computer, phone, uniform, or other items that you’ll need to provide.

Related Article: Automating Administrative Tasks Instead of Hiring.

The True Costs of Ongoing Employment

In addition to hiring costs for bringing new people into your business, you will also incur ongoing expenses, on top of their salary. Here are some of the main ones.

  • Employment Tax — In addition to the FICA taxes you deduct from your employees’ paychecks you will also need to pay additional FICA taxes as an employer. That’s currently equal to 6.2% of their salary as social security, and 1.45% as Medicare. (Numbers subject to change.)
  • Bonuses, Rewards, and Incentives — If you provide extra incentives and financial rewards for high performance, those amounts need to be factored in as well. You’ll need to weigh the pros and cons of providing financial incentives. While it’s not required, it may help you retain quality employees, which can be a money-saver overall as you won’t need to continuously repeat the process of hiring new staff to replace employees.When considering incentives, be sure to take into account additional benefits you may want to provide when hiring for more senior positions, like offering a company car.
  • Health and Life Insurance — Some employers are required to offer health insurance or else face penalties and fines. The actual costs you’d pay will vary, so make sure you consult with insurance professionals or certified tax professionals. If you provide life insurance to your staff, take into account the premium costs.
  • Retirement Accounts and 401Ks — Offering retirement accounts is a benefit many employees expect from employers, but it does have costs to you. Additionally, you may wish to contribute to your employees’ retirement accounts through matching, or offer some type of profit sharing system.
  • Vacation and Sick days — You will need to include the salary you will pay to employees when they are on vacation or away from work due to illness. Personal time and any other forms of paid time off (PTO) should be included in this calculation. In some states, vacation time must be paid out to exiting employees, as well.
  • Training and Qualifications — Assuming you provide ongoing training, plan for costs involved in teaching new skills and paying for exams and qualifications.
  • Equipment Upgrades — Existing equipment will need to be replaced sometimes due to normal wear and tear or accidental breakage. Be sure to consider the costs of repairing or replacing the core equipment your employees use, including computers, servers, printers, copiers, and desk chairs. As you grow, you may also need upgraded software or subscriptions to online services that allow for more users.
  • Travel and Employee Expenses — If your employees need to travel for work or are likely to incur other expenses, plan this into their overall cost. Functions like attending tradeshows, traveling for sales meetings, and other events cost money beyond just the event. You’ll need to plan for flights, food, rental cars or taxis, and more.

Related Article: Considerations When Expanding Your Business.

As you can see, there are plenty of areas to think about when it comes to calculating the true cost of employment. Ensure you understand the cost of hiring and paying your employees over time and as you grow. This will help you manage your employee expense base better, and means you can price your products and services to deliver profits once you’ve taken all your operational costs into account. If you need help with pricing, check out this article on calculating margin.

Resources for Small Businesses

Beginner’s Guide to Profit and Loss Statements
Free Credit Card Processing Comparison

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