How Much Does It Cost to Hire An Employee?

Hiring an employee is a decision that requires a lot of thought and planning, as the cost to hire an employee goes well beyond the salary you offer. In fact, the average cost to hire an employee is about 1.4% of their base salary. In today’s blog post we will cover the important (sometimes hidden) costs to consider when hiring an employee so your business is able to assess the true impact to your bottom line.

Salary

An employee’s base salary will be the first thing any business needs to evaluate when considering how much a new employee will cost. An employee’s base salary is what they will earn for the hours they work. For purposes of the blog, let’s assume you will hire a new employee with an annual salary of $75,000.

Recruiting Fees

How was your new employee hired? Did you use a recruiting agency? If so, don’t forget to account for placement fees which is on average, about 20% of their base salary. In this example, a recruiting fee for an employee making $75,000 per year would be about $15,000.

Bonus

Will you offer your new employee a bonus? Bonuses are another form of compensation, usually given as an incentive for achieving personal or company goals. Generally, bonuses are given on either a quarterly or annual basis depending on the company's structure. Let’s assume your new employee is eligible for an annual bonus of $10,000.

Health Benefits

Does your company contribute to a group health insurance plan? It is very common for companies to make partial contributions to the cost of employee's health insurance premiums. Let’s assume the cost of employee only coverage (inclusive of medical, dental, and vision benefits) is $8,000 per year. If your company covers 60% of the premium, it would cost $4,800 per year.

Supplementary Benefits

Does your company offer paid Life Insurance, AD&D Insurance, Short Term Disability Insurance, and/or Long Term Disability Insurance? Offering these supplementary benefits has become standard in most companies. The average cost to cover all of these benefits for your employees is roughly $420 per employee, per year (true cost will vary by age and salary).

401(k) Match

Does your company offer a 401(k) match? While you can’t predict whether or not a future employee will contribute to your 401(k) plan, it is always best to plan for what your total exposure could be. Let’s assume your company’s maximum company match is $2,000 per year and this employee meets the requirements to receive the full match.

Vacation Time

Does your company offer accrued vacation days? Depending on the state you operate in (or if it is outlined in your company handbook), you may be required to pay for accrued vacation days upon the employee’s termination. If this is an obligation for your company, you must accrue for the days an employee earns. If you offer two weeks paid vacation (10 days), the daily value of those days for an employee making $75,000 per year is $288.48 per day, or $2,885 (using the calculation of 2,080 hours per year, 8 hours per day).

Employment Taxes

Employers are obligated to match the FICA Payroll Tax which is 6.2% for Social Security and 1.45% for Medicare. Additionally, there is the FUTA Tax of .6% of the first $7,000 of wages (FUTA is typically 6% on the first $7,000 of wages, but most companies will qualify for a 5.4% credit if they pay state unemployment taxes). Other taxes to consider are state and local taxes imposed on employers for unemployment and other publicly funded programs. Additionally, be sure to factor in the cost of Workers Compensation Insurance which can vary greatly depending on the nature of your business. Using a salary of $75,000 per year, your company’s tax liability is at least $5,780 (not including workers compensation insurance, or other state and local employer taxes).

Employee Perks

Does your company offer employee perks such as gym stipends, cell phone reimbursement, legal services, pet insurance, financial services, and/or company paid lunches? For purposes of this example, let’s assume your company doesn’t offer any additional perks; however, if your company does offer employee perks, this is definitely something not to forget to add to the cost of your new employee!

Other Costs

Consider other costs that you may incur as part of hiring a new employee. Do you need to purchase new equipment (computer, phone, desk, etc.)? Will you provide them with training courses or certification programs to bring them up to speed on your company's operations or business model? These items may be necessary, and can easily add up.

Account for Increases

The average annual salary increase is about 2.7%, while 3% is standard in most companies. A 3% salary increase for an employee making $75,000 per year is $2,250 after their first year.

Total Cost

Based on the examples above, the total cost to hire your new employee with a base salary of $75,000 per year is $115,885, which is 1.5% of their base salary. See the chart below: