As a small business owner, you know that employees are your most valuable asset. But do you know how much each employee really costs? The true cost goes far beyond just salary or wages. Understanding the full picture is crucial for budgeting, pricing your products or services, and making informed hiring decisions.
Direct Costs: Salary and Benefits The most obvious expenses are the direct costs of compensating your employees. This includes:
- Base salary or hourly wages
- Overtime pay
- Commissions or bonuses
- Health insurance premiums
- Retirement plan contributions like 401(k) matching
- Paid time off including vacation, sick days, and holidays
These direct costs can add up to 1.25 to 1.4 times the base salary, according to MIT.
Indirect Costs: Taxes and Insurance On top of compensation, employers must pay mandatory expenses for each employee:
- Payroll taxes including Social Security, Medicare, and unemployment taxes
- Workers’ compensation insurance
- Disability insurance, depending on the state
These indirect costs can range from 15% to 30% of employee compensation.
Overhead Costs: Space, Equipment, and More Employees also incur overhead costs for your business:
- Office space, furniture, and utilities
- Equipment like computers, phones, and software
- Office supplies and snacks
- Uniforms or safety equipment
While harder to quantify per employee, these overhead expenses are still real costs.
Hiring and Training Costs Don’t forget the upfront costs of hiring and onboarding a new employee:
- Recruiting expenses like job board fees and background checks
- Training and orientation time for both the new hire and trainer
- Reduced productivity during ramp-up time
Hiring costs can be 16% to 20% of a position’s salary, while training can cost 10% to 20% of a year’s salary.
Putting It All Together
So what’s the grand total? Let’s consider an example employee with a $50,000 annual salary.
Direct compensation (1.4 x salary): $70,000 Indirect costs (20% of compensation): $14,000
Hiring and training (25% of salary): $12,500 Overhead (10% of salary): $5,000
Total cost of employee: $101,500
In this case, the total cost is over twice the base salary expense. Of course, these percentages vary by industry, location, and employee type. But this example illustrates why understanding the full cost is so important.
Conclusion
Employees are a worthwhile investment, but they do impact your bottom line. By familiarizing yourself with the true cost of an employee, you’ll be better equipped to make staffing decisions, set competitive prices, and keep your business profitable. Don’t let hidden costs sneak up on you – factor them into your financial planning from the start.