In June 2019, employer costs for employee compensation averaged $36.61 per hour worked, according to the U.S. Bureau of Labor Statistics (BLS).1 That number is made up of many components, and actual wages comprise only about half of the total, depending on the position.

Wages

The most obvious of all employee costs would be the wage you're paying them. You'll need to decide if you're paying by the hour or a salary-based wage, and how you set either will be based on a variety of factors, such as the skills required for the position, the level of difficulty, and what other companies are paying for similar work. You'll have to consider the starting wage as well as what kind of raises you would give the employee as time goes on. The BLS report indicated that wages and salaries averaged $25.12 per hour worked, and accounted for 68.6 percent of employee costs.

Benefits

According to the BLS, benefit costs averaged $11.48 per hour in June 2019, accounting for 31.4 percent of employee compensation costs. The benefits you offer will obviously play a big role in determining the cost per employee for your own company. Will you offer health insurance? Dental and vision? 401(k) matching? Gym memberships? Everything counts.

Taxes

Taxes were not part of the compensation costs reported by the BLS, but they're certainly a major part of employment, and will cost you even more per employee. You'll need to consider Social Security/FICA, Unemployment/FUTA, Medicare, workers' compensation, and possibly other state taxes that are based on your payroll.

Office space

There is more to the cost of an employee than wages, benefits, and taxes, however. The more employees you have, the more space you'll need, and office space typically doesn't come cheap. If you want to grow your business, you must make sure your facility can accommodate more employees. If not, you have to be willing to shell out more money for more space.

Equipment, uniforms, etc.

More workers may also mean additional equipment, uniforms, and other gear. Depending on the position and its requirements, this may be a small cost or even non-existent, but it is worth considering if you're calculating what an employee is truly going to cost you.

"The basics these days for high-tech or office workers have to include a computer and telephone," says Joe Hadzima from MIT Sloan School of Management.2 "Even with decreases in PC prices, figure on $1,000+ for a computer, $500 to several thousand for software and $250 to $300 initially per telephone handset on average when you factor in installation. Don’t forget the periodic expensive upgrades you will need to your LAN and voice mail systems.'"

Recruiting

Then, there's the cost of recruiting, which is sometimes overlooked in such calculations. Recruiting takes time, and time is money. If you're advertising job listings, that also costs money. It can be difficult to find the right person to fill a position, and if you hire the wrong one, it will cost you even more. You may need a professional recruiter, especially for an executive position. And, if you require drug testing, background checks, or special licenses, the cost of those services can quickly add up.

Training

The cost of training is also something to factor in. Any new hire is going to need training, and for many positions, training is an ongoing process in order to keep up with technology and changes in the industry.

Utilize available tools

Use tools that can help you figure out exactly what you'll be paying before you start the hiring process. There are plenty of online calculators that can help you crunch the numbers. T Sheets by QuickBooks® has a useful tool3 that can help you determine the true cost of an hourly employee.

Finding the right employees is crucial to the success of your business, and you have to be willing to pay people what they're worth if you want to keep them around. There are many factors to consider in calculating the actual cost of each employee, and you could save yourself some serious financial stress by doing the math ahead of time.

  1. https://www.bls.gov/news.release/pdf/ecec.pdf
  2. https://web.mit.edu/e-club/hadzima/how-much-does-an-employee-cost.html
  3. https://www.tsheets.com/resources/determine-the-true-cost-of-an-employee

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of Zions Bancorporation, N.A. Member FDIC