The Hidden Costs Of Hiring – How Much Does An Employee Cost In 2020?

Last updated October 8, 2020 written by Tetiana

As a business owner, you know all too well that it takes money to make money. While staffing is a significant expense, businesses indulge in it readily because the right people can increase profitability manifold.

However, if you’ve just started building your workforce, it is crucial to understand that the actual costs of hiring and retaining employees go far beyond their salaries. This can be a significant expense, especially for small business owners.

If you are figuring out the answer to the question, “how much does an employee cost an employer”… We are here to help!

The Hidden Costs Of Hiring – How Much Does An Employee Cost In 2020?

According to the U.S. Bureau of Labor Statistics, workers in the private industries saw a 2.9% increase in wages and salaries across the board for the year ending June 2020.

However, these numbers only show a partial picture of what you need to pay your employees. There was also a 2.7% increase in their compensation while the health benefits increased by 1.9% in the same period.

Nevertheless, if it’s possible to outsource some employee-related tasks and responsibilities such as customer supportappointment schedulingvirtual receptionist, etc. – do it. Check out Nexa to see their solutions that fit the needs of small and big businesses alike.

Why It’s Important To Calculate The True Cost Of An Employee

If you want to manage your finances correctly and cut down on your redundant employee-related compensation costs, it is vital to identify the real cost of having an employee.

It is an acceptable hiring practice to figure out what an employee will cost you, and it is also a crucial budgeting task. Once you know the real cost of having an employee, the cohesive data can help you better analyze, budget, and track projects effectively.

Furthermore, when you incorporate employee’s cost insights into your business practices, it saves you time and money. Also, you get a clear understanding of human capital and the ways you can retain them. Your investment in the workforce is a cornerstone of sustaining business.

Suppose you’ve set a certain amount of money in your budget to pay for the new hires. To calculate and obtain the total costs for these resource workers, you need to count all the additional costs incurred to the employee’s base salary.

From the average cost of office supplies per employee to all the other overhead costs incurred are considered when calculating the cost of an employee.

Furthermore, many factors can contribute to the total outlay of how much does an employee cost to the employer. The following are some of the most common factors:

What Goes Into Deciding The Basic Salary

If you are setting salary scales for your employees, it’d be a good idea to consider what other business owners are doing. Check out your local chamber of commerce, or you could even join the local business networking groups and swap salary and payment data to gain further insights. Also, consider the following factors:

  • Location: You’ll get paid more if you live in a big metropolitan city compared to those living in a small suburb for the same job.
  • Industry: The industry type also impacts an employee’s basic salary. For instance, auditors and accounts make more in the accounting services industry than what they get paid if they work in the tourism or medical industry.
  • Education and experience: Higher education is a must for some industries such as medicine and nursing. There’s also a great demand for experienced professionals in these niches. On the other hand, many branches of the IT industry don’t put as much emphasis on degrees as they do on hand-on experience.

How Much Do Employees Cost – A Quick Formula

According to Joe Hadzima, Senior Lecturer at MIT, you will need a simple formula to compute the real cost of an employee. Once you have considered the base salary, employment taxes, benefits, the actual costs of an employee typically range between 1.25 to 1.4 times the base salary ranges. In short, you can multiply the worker’s base salary by 1.25 or 1.4 to find the minimum and maximum cost.

This can unfortunately come down to a lot and most small and medium-sized enterprises simply can’t afford to keep fulltime employees. On the other hand, this can be detrimental to the growth of these SMEs.

Though there are some differences between the labor costs for hourly employees and salaried individuals, here is a more in-depth insight into the mandatory expenses that a salaried individual enjoys.

Non-Voluntary Expenses – What You ‘Must’ Pay For Each Employee

Let’s start with the necessary and non-compulsory expenses for salaried individuals in the United States. Interestingly enough, you can forego these expenses altogether when you opt or virtual service providers such as the ones you’d find at Nexa.

Federal Insurance Contributions Act (FICA) Taxes

Taxes that come under the Federal Insurance Contributions Act (FICA) covers the following:

  • Social security taxes
  • Medicare taxes

The current rate for social security taxes is 6.2% for the employer and employee alike and 12.4% in total. The limit for the wage base limit for social security is “the maximum wage that’s subject to the tax for that year,” as per Internal Revenue Service. For outlays in the year 2020, the maximum is $137,700.

As far as Medicare taxes are concerned, the current rate is 2.9% for  the employer and the employee in total. However, the wage base limit is not applicable for Medicare tax.

Federal Unemployment (FUTA) Tax

The Federal Unemployment (FUTA) Tax Return requires the employer to pay 6% to the employee for the initial $7000 the individual earned.

State Unemployment Tax Act (SUTA)

The State Unemployment Tax Act (SUTA) is a payroll tax that employers pay to their respective state unemployment fund. The requirements for each state taxes differ as they set it on their own. Typically, the rates are more significant for those industries that have a higher turnover.

The tax ranges between 2.7% to 3.4%. For instance, Nebraska has a rate of 1.25% while many other states see taxes as high as 3.4%. Moreover, the rate of taxation often varies for new employees and experienced ones.

Workers Compensation Insurance

Workers’ Comp or Workers’ Compensation Insurance is yet another tax requirement. Generally, small businesses need to have a policy in effect as soon as they hire the first employee.

The policy provides the necessary protection and covers the employee’s medical expenses and lawsuits concerning work-related injuries. It allows employees to take sick leave or medical care in case of a workplace injury.

Voluntary Expenses – What You ‘Should’ Pay For Each Employee

Many companies offer employees additional benefits as a way to retain them for longer. These include:

Health Insurance And Dental Plans

While health insurance and dental plans are an optional expense, they provide the most benefits to employees.

According to Hadzima’s example, if an employee earns $50,000 per year, their health insurance will fall the range of $2000 to $3000 (single) and $6000-$7000 (married employees).

Other benefits include long-term disability insurance and dental plans, which amounts to $250 and $240 to $650.

Life Insurance

The life insurance policy financially secures the employee and their family. In case of a worker’s death, the policy pays the death benefit to the deceased family. The average cost that a life insurance covers is around $150 on the initial $50,000 of your wages.

Retirement Benefits Or 401(K) Plan

The 401(k) Plan is a plan where employers set a retirement account for an employee. Under this plan, employees can save a particular portion of their income in an individual account through their employer.

The average contribution to the retirement plan is 2.5% of an employee’s salary as per Jose Paglieri, CNN reporter.

Solutions That Make A Difference – Lose The Front Desk!

As a business owner, you need to know that hiring new employees brings high labor costs besides the basic salary. Furthermore, certain mandatory expenses are unavoidable, and employers have to pay for them to stay legal.

However, it’s possible to outsource some functions. For example, the virtual receptionists and customer supper staff at Nexa can be a viable alternative to hiring in-house. You won’t have to train them, pay for their benefits or worry about their pensions – that’s no longer your problem.

This can significantly reduce your employee costs, leaving you to invest in the core functions of your business and your essential workforce.

Nexa’s platform provides you with various services to optimize and streamline your business operations in the most impactful way possible. If you want to know how Nexa works, click here to read more about our offerings.

Frequently Asked Questions

Do I Need To Have A Separate Operational Space For The Receptionist In My Office Space?

No, you don’t. That’s the best thing about Nexa Receptionists. They operate virtually from home and can cater to your clients in any part of the world, without occupying any space at your office.

How Much Will I Approximately Save By Hiring A Virtual Receptionist As Compared To A Desk Receptionist?

A major obstacle for businesses is the time and cost undertaken to answer inbound calls. By hiring a virtual receptionist, your employees can focus on other day-to-day activities of the company. Additionally, without paying life, health, or retirement benefits, your business can save up on many costs.

How Will Your Virtual Receptionist Cater To Unwanted Calls?

The virtual receptionist can qualify and filter out unwanted calls and will only forward calls with the most potential for sales conversion.

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