How Much Does Your Employee Actually Cost?
Today, any business organization faces tough competition, along with increasing costs of capital investment, demanding higher pay scales, complicated legalities, among a plethora of challenges, which affect revenue, profit, and year-end target achievements. Nevertheless, recruiting experienced personnel brings along with it expensive approaches such as Placing Ads, Screening Interviews, Testing and Training of Employees, etc. Moreover, having in-house employees brings with it many hassles like Payroll Taxes, Medical Benefits, Retirement Plans, Vacation/Sick Days, etc. Every step of the way involves some form of expense before and after acquiring employees. Even in the long-run, the total cost of acquiring an employee is still be high. Consider hiring involves hiring costs, operational overheads, infrastructure expenses, and HR hassles considerably. Let us look at the various costs of having an Employee. Basic Acquisition Cost for an Employee through Agency or Hiring For acquiring any employee, all processes beginning with searching for one, shortlisting from all the received applications, holding test and interviews incur costs in terms of time, efforts and most importantly money. Consider all types of costs such as placing advertisements in newspapers, tabloids, or even digital platforms, or having a recruitment agency bear the burden of inviting job applications from interested and suitable candidates. Posting on Job Boards, Screening Resumes, Shortlisting Candidates, Conducting Background Checks, etc. along with any On-boarding or Recruiting Time estimated, and the notice period to be served in the previous organization of the newly Recruited Employee called as Waiting Time (usually in several weeks or months) are cost inductive activities since the beginning. Furthermore, temporary hiring agency solution would have recurring costs and liabilities and certain disadvantages as compared to having permanently appointed personnel within your organization. An estimated cost of approximately $4500 is incurred when hiring one candidate for a job role within your organization. Payroll Taxes & Health Insurance For every employee taken aboard, numerous financial liabilities need to be addressed and kept on track. For every employee’s salary paid every month, the controller needs to track and levy all taxes and deductions to meet the stringent guidelines set by the IRS and Tax laws as specified every year. Especially, since the introduction of the TCJA Act 2018, there have been several amendments to specific sections such Payroll Tax and Health Insurance. With effect from 2018, the FICA tax rate for employers is set at 7.65% of which, 6.2% is levied on OASDI (Old-Age, Survivors and Disability Insurance program) and 1.45% TAX on Hospital Insurance (HI, commonly known as the Medicare Tax). Thus an employee will pay:
- 2% Social Security tax on the first $128,700 of wages (maximum tax is $7,960.80 [6.2% of $128,400])
- 45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
- 35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return) as per Code Sec. 3101(b)(2)
Conclusively, for every employee that you have recruited for your organization, you will have shell out and extra $7,960.80 for an employee with a salary of $128,400 (or more as applicable). Paid Time Off Having salaried personnel implies there are possibilities of unforeseen leaves or sanctioned holidays when the need arises. People need leaves — planned or unplanned every year, and hence, every organization has a leaves policy entitling every employee to having sanctioned paid leaves every year. Such leaves incur every organization some costs in the absence of those employees in a certain period. Apart from the amount of salary payable for days absent, in proportion to their entitled salary per month, other costs are not of cash in nature but more of operational hindrances such as the workflow being affected or held up until the employee returns from their leave period. Or, if the employee is a key person in management or in some process of decision making, then the time lost might probably affect the revenue or maybe cash outflow, since crucial decisions were not taken on time. All such impending costs add up to the expenses of your organization, increasing the cash outflow, and thereby, affect the yearly revenue. Retirement Savings Benefit Retirement Savings Benefit is a provision that every employee and employer has to plan and implement when negotiating the salary components and the dues deducted therein. Under this 401(k) Retirement plan, the contribution limit is $18,500 in 2018 for all employees under the age of 50, and those age 50 and above can make catch-up contributions of up to an additional $6,000, for a maximum possible contribution of $24,500 in 2018. It is to be noted that management and professional positions generally have the biggest employer contributions, with the highest 401(k) matches tend to be paid out by large companies with over 100 employees (according to Bureau of Labor statistics data). The most common 401(k) match is 3 percent of salary, with few others employees asking for up to 10 percent of pay or more for retirement. The most common employer match is 50 cents per dollar saved up to 6 percent of salary agreed upon. Nonetheless, many employers might provide dollar per dollar 401(k) matches to a maximum possible match of 3 percent of salary. Thereby, you can consider that an average of 3-5 percent of net salaries paid is an additional expense in your business. Attrition / New Hire / Onboarding – training Employees are human beings, making it impossible to hold your best performing employee from staying with your organization permanently. Greener pastures can crop up anytime during their entire career span, and it may happen that people may shift to other cities or countries, making them look for other sources of income. As with such situations, you are back to square one, with seeking and selecting a new candidate for the said job position. Every Attrition is followed by new hiring, followed by onboarding and training schedules which are nothing but increased costs incurred till the time the recruited candidate beings operations and turns beneficial to your organization. This again amounts to an average of about $4000 per employee recruited any time during a financial year. Overhead Costs All significant expenses discussed about, leaves us with Overheads incurred per employee within your organization. Infrastructure facilities such as floor space, furniture, hygiene facilities, lighting, cooling, and ventilation mechanisms, in-office cafeteria inventory and operational expenses, etc. are all forms of overheads incurred per employee in your organization. An estimated $250-$1200 is expended per employee per month considering the bare minimum of facilities provided within organization. With all the given facts & figures, the average cost runs between $15,000 -$35,000 per year besides the actual salary paid to every employee. However, many larger firms have saved enormous by establishing their offshore offices and doing away with most of the compliance mentioned here. For smaller firms remote staffing brings a similar solution. You can read about it in more details in our eBook: Save:$26,000 to $60,000 Per Employee.