If you think you can squeeze in the higher salary your new employee is negotiating for, take a look at the numbers beyond the base salary rate your employee sees.
There are many costs associated with paying your employees that you might not be aware of, especially if you are just starting out. When developing your hiring budget, be sure to factor in these hidden costs:
1. FICA and Medicare. The Federal Insurance Contributions Act mandates that 12.4 percent of earned income must be paid to Social Security. However, the maximum dollar amount caps at $113,700.
In addition, 2.9 percent must be paid to Medicare. Both of these taxes are split between the employer and employee, meaning, of each employee’s salary, you pay 6.2 percent to Social Security and 1.45 percent to Medicare. The other half is automatically withheld from the employee’s paycheck.
2. Federal and state unemployment. Unlike the taxes above, employers are the only ones who bear the burden of both federal and state unemployment taxes. For 2014, the Federal Unemployment (FUTA) tax rate is 6 percent, which applies to the first $7,000 you pay to each employee as wages during the year.
The state unemployment tax rate varies by state.
3. Workers Compensation Insurance. The Department of Labor’s Office of Workers’ Compensation Programs uses these taxes to fund major disability compensation programs. Worker’s Compensation insurance rates are determined by risk classification in each industry. For example, rates in the utilities and communications industry range anywhere from $0.15 to $1.44 per employee per hour worked. At full-time, that could cost as much as per employee $2,995.20 annually.
4. Health insurance. On average, health insurance costs are at 7.9 percent in the private industry, 9 percent for goods-producing industries and 12.6 percent for union workers. Annual family health coverage premiums have seen a 4 percent increase from last year, reaching $16,351. Employees paid $4,565 toward that cost, leaving employers with the remaining $11,786.
Considering premiums have increased 80 percent since 2003 and more than doubled since 2002, expect rising health insurance costs to continue impacting employment costs.
Related: 20 Low-Cost Employee Perks
5. Fringe benefits. Fringe benefits are a form of pay for the performance of services, including bonuses and the use of company vehicles. Of course, these costs vary, but right now the national average is at 9.1 percent of the salary added on.
6. Administrative costs. Administrative costs include HR functions and paperwork. Right now, the national average is 10 percent.
7. Non-productive time. These hidden costs only impact salaried employees because there is no time clock to track the amount of hours spent out of work. Non-productive time includes paid time off such as holidays, sick days, vacation days and personal days. Again, this cost varies depending upon schedule and what is offered.
To calculate this cost, multiply the amount of hours allotted for time away by the rate per hour. At the full-time rate of $12 per hour for 8 hours per day, an employee would still be paid $96 for each day, even though they are not in the office.
Although these hidden costs vary, they make a big impact when it comes to payroll. Many companies use software to help them break down these costs and simplify wage attachments, ensuring all taxes and fees go to the appropriate agencies.
Before you finalize your budget and make any major hiring decisions, consider what you’re really paying your employees. Take note that a higher negotiated salary could cost you more than you bargained for.