Exactly how Expensive is Adding a Worker to your Employee

Exactly how Expensive is Adding a Worker to your Employee Payroll

Businesses considering hiring a full-time employee know that an employee is kind of a permanent commitment. Small businesses without experience in employee payroll matters, when they plan for their foray into employment, often fail to take account everything that they commit themselves to taking on an employee. Usually, they just end up thinking about the hourly rate that they pay the worker. The hourly rate that a skilled mechanic who works for a car repair business can command is about $14. Before all is said and done though, that $14 turns into $19 for a variety of reasons. They call this the loaded rate; the extra five dollars come from all kinds of fixed costs from government mandated expenses to uniforms, time off, insurance, taxes and training expenses. When the government tries to get small businesses to employ from among the unemployed by offering them a tax break for it, nothing the government can do can actually make up for the extra five dollars every hour that a business has to shell out. Workers have always been among the most expensive investments that small businesses are likely to ever have to make.

So the basic rule of thumb is that employee payroll ends up costing about a quarter to a third more than what the base wage rate is. For most small businesses with a handful of employees, employee payroll actually ends up costing them about 70% of their revenue. A friend of mine owns an Indian food delivery business out of her home. She's been very successful; but her success has meant that she has needed to work about 18 hours every day in her kitchen. She's planning on getting a business license, to move out into a commercial kitchen, and hiring her first couple of employees. She has discovered that she needs to be ready for a number of expenses on top of the base wage. To begin with, she'll need to pay a 12% Social Security tax on her business earnings; and then there are Medicare taxes for all the wages she pays, she needs to pay in unemployment insurance tax, a state unemployment tax, and so on. And then there is the fact that an employee is not a machine. Employees need free coffee, perhaps free lunch, a transportation allowance, time off, and so on. Not to mention, there is the cost of training an employee. An employee is bound to make mistakes that affect how much the business ends up earning.

What happens if an employee, after a few weeks on the job, decides it's not going to work out? The first three months that you retain an employee tend to be the most expensive ones. They are going to be slow on the job, they are going to make mistakes, and so on. If they stay for a couple of years, that expensive initial phase can be easy to make up for. If they quit after a few months, that's going to be especially expensive. The governments incentives, like the year-long tax holiday you get on Social Security employee payroll taxes, can help. But more needs to be done. If the opposition hadn't shot down all the other incentives that Pres. Obama proposed, the country's employment figures would be in much better shape now.

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