How Much Does It Really Cost to Hire an Employee?
Hiring an employee is a big decision. A great employee can be a huge win for your business, but they’re also expensive. As you factor in the cost, you have to think about so many things that go beyond their salary.
For example, would you need additional insurance coverage? This can vary depending on types of insurance, the employee, and where you do business. As an example, commercial auto insurance in New Jersey might be more expensive than it is in Texas. There’s also workers’ compensation to consider, the costs of benefits, and so many other factors.
We break down some of the costs of hiring employees below.
The cost to recruit new employees is one of the highest hiring costs aside from salary. Recruitment costs can include everything from fees to post on job boards to interviews, recruitment screening, the best software for recruiters and events.
As part of these costs, you can also include pre-employment background checks.
The average cost per hire, according to the Society for Human Resource Management, is almost $4,700. However, there are a lot of employers who estimate the cost of hiring a new employee can actually be anywhere from three to four times more than the salary of the position. If you’re hiring someone for a role paying $60,000, you could spend upwards of $180,000 to fill it.
Around 30-40% of these are usually estimated to be hard costs, with the rest being so-called soft costs.
Soft costs include things like time spent by hiring managers in the process.
There is also a big impact on productivity when you lose a team member and you have to do the work to replace them.
Onboarding and Training
After you’ve hired a new employee, you have to provide thorough training so they can begin to be productive for the business. Training is one of the most expensive but critical investments you can make when it comes to employees.
Onboarding usually occurs at the start of the training process, right after someone has been hired. Onboarding is when you start to engage new employees and make them a true part of your team so they can ultimately be productive working within it.
Onboarding costs include orientation tasks, filing forms, and the costs for your IT team to update systems for the new employee.
Training costs include the materials and equipment used, the time spent training, and the costs of training experts that you might hire.
Salary and Employee Benefits
Once someone comes on board and is officially a new employee, you have to pay their salary and employee benefits, which will make up the bulk of your hiring costs.
Employee benefits can include things like free coffee or snacks, medical and dental plans, life insurance, and things like tuition reimbursement.
Based on data from the U.S. Bureau of Labor Statistics, benefits make up 29.6% of the average cost per private employee. That comes out to around $11.42 an hour in benefits. The rest of that, or $27.19 per hour on average, goes to wages, and the total cost on average for private employees is $38.61.
In 2022, total compensation was up 5.4% from 2021, and wages and salaries were up too. Employee benefit costs also went up from 2021.
Health insurance costs per hour per employee are $2.76 on average, with that making up more than 94% of the total cost of employee benefits. Coming in behind that cost are short-term and long-term disability as well as life insurance.
Some employers offer a vast range of other benefits that employees are increasingly asking for, like personal well-being benefits, paid parental leave, childcare benefits, and benefits related to family planning, like adoption assistance and fertility treatments.
Healthcare insurance remains the main benefit that employers cover. In 2021, according to the Kaiser Family Foundation, the average cost of premiums for family coverage went up 4% to $22,221. The average annual premiums for individual plans also went up 4%, reaching $7,739.
For employers, the average health insurance cost was 73% of the premium, which was $16,253 annually to cover a family, and for individuals, $6,440 or 83% of the premium.
Group health insurance premiums in 2021 cost employees $5,969 annually on average for family coverage, so they were responsible for about 27% of the premium. For individuals, it was around $1,299, or 17% of the premium.
Workers’ Comp Insurance
Most small businesses with less than $300,000 in payroll pay an average of around $70 per month for workers’ comp insurance.
The cost varies between businesses, with insurance companies considering factors like industry, the type of work employees are doing, claims history, and payroll as they determine the premiums.
Most states require that an employer has this coverage if they have employees, and it helps employees recover from injuries or illnesses they got on the job or that were work-related.
The bigger your staff, the more workers’ comp coverage is because your payroll becomes part of your calculation for premiums. If your industry includes higher-risk work, your premiums will be higher as well.
Other insurance that you might need will depend on the work the employee is doing. As mentioned above, you might need to add or change your commercial auto policy, you could need professional liability coverage, and you might need to have a bond which is insurance that protects a third party which is your customer.
The cost of payroll taxes depends mostly on how many employees you have and how you pay them because they’re a percentage of the gross taxable wages of each employee rather than a set dollar amount.
Payroll tax includes Social Security and Medicare, and both are part of the Federal Insurance Contributions Act FICA. Both employers and employees pay them.
This is just a short overview of some of the costs associated with having an employee. According to the Small Business Administration, the rule of thumb is that an employee will cost you anywhere from 1.25 to 1.4 times their salary, depending on some variables. If someone has a salary of $35,000 based on this calculation, your actual costs could end up being anywhere from $43,750 to $49,000.