What Does it Really Cost to Hire an Employee?

July 21, 2014 by Ed Becker

If you are a newer small business you most likely have been doing everything on your own, or have family that helps work the business. At some point there may simply be too much to do or something that requires a skill set you do not have. You will have to consider hiring an employee, or hiring out work to a private contractor. Do you know what it actually costs to hire an employee?

What are the expenses of hiring a new employee?

• Advertisement- help wanted ads, videos, brochures
• HR salaries- interviews, reference checks, orientation
• Job fair expenses
• Postage, office supplies for recruitment
• Background checks, references, ID checks
• Applicant testing time and materials
• Salary of new employee
• Supervisory and training staff salaries

These expenses will vary depending on how long you are searching for employees, how many you are hiring and how long you need to train them. You would add up all your expenses and divide it by how many employees you hired to get a cost per employee. Here is a worksheet can help calculate this information. How much it costs to recruit and hire an employee depends on the position level. An entry level employee may cost 1.5 times their salary to hire, but a middle management employee may cost up to 2.5 times their annual salary. The difference depends on how much recruiting and training you would have to invest.

What benefits do you need to consider for a new hire?

• Social security tax
• Medicare tax
• State unemployment tax
• Healthcare benefits
• 401(K) benefits
• Continued education and training

Your expenses depend on employee benefits, training programs, and how long it will take for your employee to adjust and master their work. You may also do business in a state that borrowed money for unemployment benefits which has to be repaid to the Federal Government, making state unemployment taxes higher.

It is estimated that it takes about half the year for a new employee to be productive; once they are productive, it costs the employer 18-26% of their annual salary to keep that employee. With this in mind, if you have a $50,000 employee, your hiring costs could be upwards of $100,000. The cost to keep that employee would then be about $66,000 per year thereafter.

After understanding the total cost of hiring a new employee, it is easy to understand why many employers are utilizing freelancers and private contractors more than before. The freelance market has spiked tremendously over the last several years, especially with the economy and employers needing to cut costs.