How much does an employee cost?<\/h2>\n\n\n\n
Let\u2019s say that you\u2019ve set the desired pay for your new worker. In order to calculate the total costs for that employee, you\u2019ll need to add the additional costs to his\/her base salary\/wage.<\/p>\n\n\n\n
Note that there\u2019s a difference between a salary and a wage. Thus, there are also salaried and hourly employees. Salaried<\/b> workers receive a fixed amount of money per pay period. On the other hand, wage earners<\/b> (hourly employees) are paid by the hour.<\/p>\n\n\n\n
There are many factors that impact the full outlay of an employee. Some of these elements are:<\/p>\n\n\n\n
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- Location – your paycheck won\u2019t be the same if you\u2019re living in Miami and if you\u2019re in New York City. Since costs of living are much higher in New York City than Miami, your wage\/salary would have to be higher in New York City, too. Check out this handy cost of living calculator<\/a> from CNN and test it yourself.<\/li>\n\n\n\n
- Industry sector and preferred skills for that industry.<\/li>\n\n\n\n
- Education and experience levels.<\/li>\n\n\n\n
- Company size.<\/li>\n\n\n\n
- Job tasks and your performance.<\/li>\n<\/ul>\n\n\n\n
\n\ud83d\udca1Employee\u2019s performance is a helpful factor because it helps you calculate the value that employee brings to your company, as well as to figure out employee productivity. Find out more from this blog:<\/p>\n
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- 8 fast ways to increase employee productivity in the workplace<\/a><\/li>\n<\/ul>\n<\/div>\n\n\n\n
Joe Hadzima, a Senior Lecturer at MIT, came up with the idea of how to calculate the total employee costs<\/a>. In his opinion, the typical costs of an employee are usually between 1.25 to 1.4 times more than their base income. So, you can multiply the base income by 1.25 or by 1.4 to figure out the minimum and maximum outlay.<\/p>\n\n\n\n
There are certain differences between labor costs for salaried and hourly employees. That is why we\u2019ll first explain all necessary and voluntary expenses for salaried employees. After that, we\u2019ll cover the payments for hourly employees.<\/p>\n\n\n\n
For salaried employees<\/h3>\n\n\n\n
First, let\u2019s see which expenses are necessary and which are non-compulsory for salaried workers.<\/p>\n\n\n\n
Mandatory expenses<\/h4>\n\n\n\n
If you\u2019re a business owner, be sure that these are the taxes that you have to pay for your new salaried employee:<\/p>\n\n\n\n
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- Federal Insurance Contributions Act (FICA tax) for Social security,<\/li>\n\n\n\n
- FICA tax for Medicare,<\/li>\n\n\n\n
- Federal & Unemployment Insurance Tax – (FUTA) tax,<\/li>\n\n\n\n
- State Unemployment Insurance (SUTA) tax, and<\/li>\n\n\n\n
- Workers\u2019 compensation insurance.<\/li>\n<\/ol>\n\n\n\n
Now, we\u2019ll dive into more details about each of these expenses.<\/p>\n\n\n\n
Federal Insurance Contributions Act (FICA) taxes – Social security and Medicare<\/h5>\n\n\n\n
FICA taxes include:<\/p>\n\n\n\n
- \n
- Social security taxes and<\/li>\n\n\n\n
- the hospital insurance taxes – Medicare.<\/li>\n<\/ul>\n\n\n\n
When it comes to Social security taxes, the current rate is 6.2% for the employer and 6.2% for the employee (12.4% total). Besides, there\u2019s a wage base limit for Social security. According to the IRS, the wage base limit<\/a> is \u201cthe maximum wage that’s subject to the tax for that year\u201d. For payments in 2020, this limit is $137,700.<\/p>\n\n\n\n
Speaking of Medicare taxes, the current rate for these expenses is 1.45% for the employer and the same percentage for the employee (2.9% total). Unlike the Social security taxes, there\u2019s no wage base limit for Medicare.<\/p>\n\n\n\n
Federal and Unemployment Insurance tax – (FUTA) tax<\/h5>\n\n\n\n
Regarding the FUTA tax<\/a>, the employer is required to pay 6% for the first $7,000 the employee has earned. Many companies choose to cover these expenses on an annual basis, which is $420 in total.<\/p>\n\n\n\n
But, there\u2019s also an exception. In California, employers\/companies have to pay 2.1% or $147 annually.<\/p>\n\n\n\n
State Unemployment Insurance (SUTA)<\/h5>\n\n\n\n
When it comes to SUTA taxes, this expense is different for each state. In general, it can be between 2.7% and 3.4%.<\/p>\n\n\n\n
However, there are certain states with lower tax rates for SUTA. For example, in Nebraska the rate is 1.25%. But, these percentages can get higher than 3.4%. For instance, in Minnesota, this tax rate goes from 1% to 8.9%.<\/p>\n\n\n\n
The employers pay for SUTA, but in Alaska, New Jersey, and Pennsylvania, SUTA is partially accumulated from an employee\u2019s wages.<\/p>\n\n\n\n
Also, there\u2019s a separate rate for new employers and for experienced employers. Take a look at more details about SUTA taxes<\/a> in your state.<\/p>\n\n\n\n
Workers\u2019 compensation insurance<\/h5>\n\n\n\n
Another required tax is the Workers\u2019 compensation insurance. The purpose of this payment is to insure employees against work-related injuries. Each type of job has its own rate for every $100 of wage\/salary.<\/p>\n\n\n\n
Since particular jobs are riskier than others, industries like landscaping will have a higher rate – $6.94, than jobs that take place in an office – $0.12.<\/p>\n\n\n\n
Now, let\u2019s take a closer look at the non-required payments.<\/p>\n\n\n\n
Non-mandatory expenses<\/h4>\n\n\n\n
Many companies choose to provide their staff with some additional benefits. If you\u2019re considering these options for your employees, here\u2019s the list of the most common voluntary expenses:<\/p>\n\n\n\n
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- Health and dental insurance<\/li>\n\n\n\n
- Paid Time Off (PTO)<\/li>\n\n\n\n
- Life insurance<\/li>\n\n\n\n
- Long-term disability insurance<\/li>\n\n\n\n
- Retirement savings or 401(k) Plan.<\/li>\n<\/ol>\n\n\n\n
Health and dental insurance<\/h5>\n\n\n\n
While Medicare is a compulsory expense, health insurance is a voluntary payment. This insurance is among the highest of all benefits. The above-mentioned Joe Hadzima gave an example of this expense. So, if an employee makes $50,000 a year, his\/her health insurance will be between $2,000-$3,000 (single employees) and $6,000-$7,000 (for families).<\/p>\n\n\n\n
Speaking of dental insurance, this payment depends on the number of employees, the type of insurance, and the location of your company. According to Hadzima, the average dental insurance will be from $240 to $650.<\/p>\n\n\n\n
Paid Time Off (PTO)<\/h5>\n\n\n\n
Paid Time Off (PTO) is a policy that covers:<\/p>\n\n\n\n
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- vacation time,<\/li>\n\n\n\n
- sick leave,<\/li>\n\n\n\n
- personal time,<\/li>\n\n\n\n
- federal holidays,<\/li>\n\n\n\n
- family leave,<\/li>\n\n\n\n
- maternity and paternity leave.<\/li>\n<\/ul>\n\n\n\n
Based on the regulation by the Fair Labor Standards Act (FLSA), this policy is not obligatory in the U.S. But, many companies include PTO as one of their employee benefits.<\/p>\n\n\n\n
If this applies to your company, be sure to create a practical system for scheduling PTO. In fact, try using a free PTO tracker<\/a>. This way, your employees can request their time off, and then you can approve it. Furthermore, you\u2019ll be able to see who is currently using their time off in the weekly report.<\/p>\n\n\n\n
Life insurance<\/h5>\n\n\n\n
Life insurance is a policy that can be significant both for the employees and their families. This policy provides financial security for the family of an employee, in case of his or her death. It\u2019s important to clarify that the insurance covers the case of an employee’s death only if the death is not due to his\/her fault.<\/p>\n\n\n\n
When it comes to life insurance, Joe Hadzima says that the average outlay is around $150 on the first $50,000 of your wages.<\/p>\n\n\n\n
Long-term disability insurance<\/h5>\n\n\n\n
Long-term disability insurance (LTD) is a policy that insures employees in case of an illness, injury, or an accident. If any of these events happen, the employee will still receive a percentage of an income. But, LTD insurance does not cover work-related accidents, since these are included by the Workers\u2019 comp insurance.<\/p>\n\n\n\n
Before an injured employee starts obtaining LTD insurance, he\/she will first receive the short-term disability insurance (STD). The STD insurance usually lasts from three to six months. After this period, an employee will get a certain percentage of the salary, usually 50-70 percent, due to LTD.<\/p>\n\n\n\n
As for the employer who provides this insurance to his\/her employees, Hadzima claims that the average amount of a long-term disability insurance is $250, for a wage of $50,000.<\/p>\n\n\n\n
Retirement savings or 401(k) Plan<\/h5>\n\n\n\n
In the private sector, the 401(k) Plan is a retirement account that employers can set for their staff. Employees can choose if they want their employer to contribute a part of an employee’s salary to an individual account (under this plan).<\/p>\n\n\n\n
Employers can manage the 401(k) Plan themselves, or they can hire a professional to handle this payment. Usually, companies hire a bank, a mutual fund provider, or an insurance company, to run the Retirement savings.<\/p>\n\n\n\n
According to CNN\u2019s reporter Jose Paglieri, the average contribution to the Retirement savings<\/a> plan is 2.5% of a worker\u2019s salary.<\/p>\n\n\n\n
To sum up, we\u2019ve collected all obligatory and non-obligatory expenses for salaried employees in one place. Take a look at the table below to better understand the payments you\u2019ll have to make for a new employer.<\/p>\n\n\n\n
![\"Employee](\"https:\/\/clockify.me\/blog\/wp-content\/uploads\/2020\/06\/Employee-cost-1-min.png\")
<\/figure>\n\n\n\n![\"Illustration\"](\"https:\/\/clockify.me\/blog\/wp-content\/themes\/cake-blog\/theme\/images\/banners\/clockify\/landing-1@2x.png)
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