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Accounting Services 101 | What’s the True Cost of a New Employee?

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Accounting Services 101 | What’s the True Cost of a New Employee?

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img-mark-wald.jpgAs an employer, the true cost to hire an employee is more than just the wage or salary you offer them. When we build budgets & forecasts for our clients, the additional costs we consider are primarily employer payroll taxes, insurance, and employee benefits. Here are some tips to help entrepreneurs and small business owners budget for the total cost of adding staff:

Employer Payroll Taxes:
Employer payroll taxes are broken down into multiple categories, each with their own tax calculation rates and caps per employee. Estimating 9 or 10% of total wages is a good general rule of thumb for high-level forecasting, but in reality the employer payroll taxes for each employee can vary significantly depending on their individual earnings in each tax year. For example, the combined total employer payroll tax expense for California businesses start at over 12% of gross wages for new hires but then quickly decreases (after the first $7k of compensation per employee) to an average of around 8.5% for an employee earning $50k annual salary. Combined employer payroll taxes can get as low as around 6% of gross wages for employees earning close to $200k but then shoot up almost a full percentage point on an individual employee's earnings in excess of $200k in one year. At the bottom of this post is a nice infographic that summarizes employer payroll costs for CA employers.

Workers Compensation Insurance:
Most businesses with 5 or more employees need to budget for workers compensation Insurance, the cost of which can vary significantly based on the physical risks that individual employees face in their work environment--insuring workers in manufacturing facilities will cost more than clerical office environments, for example. As with any business liability insurance coverage, it is important to balance the coverage limits and exclusions with the premium costs. Plan on $500-$2k for the first year, depending on various factors.

Employee Benefits:
Medical and other fringe benefits are currently optional for small businesses (fewer than 50 employees) but offering these benefits may be an effective part of a small business' talent acquisition strategy and may not necessarily be as expensive as you might expect. Plan on $100-$1k per employee per month, depending on how generous you want your benefits plan to be and what the demographics are of your covered staff.

At Supporting Strategies, we have experienced accounting professionals who understand these costs from a strategic and a tactical perspective. We routinely review what our clients pay for insurance and benefits in case there appears to be an opportunity for significant savings. And we have the experience and skills required to accurately forecast employer expenses to help our clients budget for growth without any surprise costs.

If you have questions about this or any other topic related to business accounting, feel free to contact me directly at 310-625-6262 or mwald@supportingstrategies.com. Check out the infographic here

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Mark Wald

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Mark Wald

Mark Wald, Managing Director, Supporting Strategies | Santa Monica, LA, and Ventura County, provides bookkeeping and controller services to growing businesses.

Legal and Tax Disclaimer

This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.