Hiring new employees can be an exciting time for your business. Because you are hiring more people, it means your business is growing and expanding. However, bringing on more workers may cost you more than you were expecting.
Aside from your new workers’ salaries, be expected to fork up an extra 25% to 40% on top of what you are already paying them. So for example, if you pay someone a salary of $50,000, the employer’s actual costs will be closer to $62,500 to $70,000. Some added costs are mandated by the government whereas others tend to slip under the radar if you are not careful. Fortunately, there may be an opportunity for tax savings to offset some of the additional costs.
Mandatory Additional Costs of an Employee
Hiring employees means additional payroll taxes including:
1. Employer share of FICA
This is an extra 7.65% tax on compensation up to $142,800 for 2021. There is also a 1.45% tax on compensation over the $142,800 annual wage base.
2. Federal unemployment tax (FUTA)
The FUTA tax rate is 6% with the maximum wages subject to tax is $7,000. Most employers are eligible for a FUTA tax credit of 5.4% meaning that most employers only end up paying 0.6% in FUTA tax.
3. State Unemployment Tax (SUTA) or (SUI)
SUTA rates vary from state to state. The more claims made by former employees for unemployment benefits, the higher your SUTA tax rate will be.
You can check out the 2021 SUTA rates by state here.
Insurance coverage for employees also needs to be addressed.
1. Workers Compensation
Costs vary from state to state. The type of work is also very important when determining how much workers comp will cost. For example, a construction worker will cost more in workers comp than an administrative worker because the construction worker is much more likely to get hurt on the job.
2. Other Insurances
There are other insurances that may be needed depending on the industry of the firm. Professional firms may be required to pay for professional liability coverage. Many firms are also required to have a bond, which is a type of insurance for an employee to protect a third party (usually the customer). For example, a bond may be needed for workers who clean people’s homes. That bond protects the homeowners’ valuables from damage or theft caused by an employee.
While these costs may seem steep, the good news is all these are fully tax deductible.
Other Costs of a Worker
Many businesses choose to offer some kind of benefits to their employees. Under federal law, only larger employers (those with 50+ full-time employees) are mandated to offer health insurance or risk facing a penalty. Small businesses are not required to offer any health insurance, but for those that do, there is a federal tax credit for smaller employers who chose to provide at least 50% of the cost of health coverage.
Similarly to health insurance, federal law also requires larger employees (those with 50+ full time employees) to offer unpaid family and medical leave. The cost of this is dependent on the state. A number of states already have paid leave laws. Some states put the cost on employees in the form of wage withholding, while others require employers to share in the cost. The District of Columbia has decided to put the entire cost burden on employers.
Employers may choose to offer retirement plans, such as a 401k and Roth IRAs. The federal government doesn’t require any employer to offer retirement plans, but many still chose to offer them. Employers who offer a robust benefits package are much more attractive to and can keep great employees.
In addition to the employee benefits already mentioned, there is a slew of other employment-related costs that may be difficult to quantify. Things like:
1. The cost of recruitment, background checks and drug testing
2. The cost of training an employee
3. Other Miscellaneous items like uniforms and in some cases, protective gear
Hiring employees can be more costly than anticipated. Make sure to thoroughly go through each benefit you offer and who is responsible for the contributions. If your business is growing and you need more manpower, you cannot afford to not hire more people. However, knowing the cost will help you budget accordingly.
Partnering with a PEO like CornerstonePEO may be in your best interest. CornerstonePEO covers everything from HR and employee benefits to payroll and workers comp. Our industry leading PEO services offer innovative, cost effective, easy to understand business solutions for companies of any size and industry. Contact us to learn more.