How Much Do Employees Cost?
Let me start by saying the answer to this is nowhere near static. With a lot of dynamics in play, there are several variables that will have an impact. Such as:
- Whether the employee is a new employee
- What region a business is headquartered in. (Northeast, Midwest, South, West)
- Whether you are reading this when it was authored in 2019 or at a later date
- Is your employer in the public or private sector?
I mention the above because I want to be clear that everyone reading this article, even if you are in the USA, may need to look for very specific answers elsewhere.
Having said that, as an employee, realize that wherever you live and work, your employer is paying more than your salary to keep you on staff.
For the most part, the following are generalities, but I will link to an employee cost calculator later in the article for those who need it.
In order for an employer or future employer to get a ballpark of how much an employee costs, I’ll delve into the variety of expenses that need to be covered. Going through these and adding up your local costs will give you at least a close guesstimate of an employee cost calculation.
Let’s start right at the beginning.
The Cost to Hire a New Employee
Since employee turnover is an unfortunate reality, new employees need to be hired.
As companies grow, they are faced with the need to hire new employees.
In either case, there are costs associated with these new hires, and in some cases, the cost to replace a leaving employee is going to be different than the costs for an entirely new position.
- Glassdoor recently stated that the average employer in the U.S. spends approximately $4,000 to hire a new employee.
- The Society for Human Resource Management reports that on average it costs about $4,100 to hire an employee.
- The National Association of Colleges and Employers shares that a company with 0 to 500 employees will spend an average of about $7,600 to hire a new employee.
As those statistics clearly indicate, there is quite a variance in the amounts reported. The National Association of Colleges and Employers reports a number almost double the others in the case of larger companies, but there could be other factors as well.
Some typical recruiting costs include:
- Internal recruiting costs. This would include expenses like the salary for a staff recruiter and any time they put into filling the specific position, as well as any type of referral program you might initiate.
- External recruiting costs. If you use an outside recruitment agency or headhunter, your costs will be significantly more. Typical costs will include fees to advertise on job boards, agency fees, and any background and or criminal checks you might do.
According to Top Echelon, the makers of a recruiting software platform, and the data they tracked in their network in 2018:
- The average recruiting fee was just over $20,000
- The average fee percentage was 21.5%
- The average starting salary was nearly $93,500
Clearly, these numbers are a representation from a bracket of higher earners, but you get the picture.
It costs an employer a significant amount of money to hire employees.
The Cost to Train a New Employee
Moving on to the next segment of how much does an employee cost brings us to the cost to train them.
Even if you’ve hired someone who is an expert in their field, they are going to need training on how to integrate into your specific organizational environment.
You can expect that if the position is one that carries a higher pay grade and more responsibilities, the more it’s going to cost you to train them.
Here’s a quick checklist of some of the essential areas of training a new hire will need:
- Company overview
- Benefits package
- IT setup
Obviously, all of this isn’t going to happen in the first few days of employment. You can expect the training period to extend the length of a probationary period.
At this point, it’s not just the new hire that’s cost you money. Training takes up the time of other employees as well. You need to factor in their lack of production while teaching a new hire new tasks or policies.
The Society for Human Resource Management reports that replacing an employee will cost you about 38% of their annual income. This includes not only the costs of recruitment and training but also the loss in production mentioned above.
And since we’re talking about how much does an employee cost, what about hiring for a new position? If you think that might be cheaper, think again.
The employee cost calculation for a new hire is often higher. This is due to the fact that there may not be a previous workflow to be followed or taught.
Regardless, new hire training is a labor calculation that needs to be considered.
We’re not done answering how much does an employee cost!
Because… taxes. There is no escaping taxes.
To calculate employer payroll taxes, you need to combine 50 percent of Social Security taxes or 12.9 percent of your employees’ wages along with 50 percent of the Medicare taxes, or 2.9 percent. Finally, add 100 percent of both state and federal unemployment taxes.
Employers must pay:
- Social Security taxes
- Medicare taxes
- Federal unemployment taxes (FUTA)
- State unemployment taxes (SUTA)
- Workman’s Compensation Insurance
- Any local payroll taxes
Of course, you can do the math yourself, but who wants to do that. It’s much easier to use an Employee Cost Calculator. There are several available, and as promised above, I’ll leave a link to one at the end of this article.
The above payroll taxes typically cost an employer about 15% more on average than the employees actual salary.
Paid Time Off
Depending on the package you negotiate when you’re hired, you have at the very least vacation time.
Added to that you may have:
- Paid sick days
- Personal days
- Paid federal and state statutory holidays
- Paid breaks throughout the day
The more competitive you need to be as an employer to attract new talent, the more paid days you’ll need to offer. Which translates to an employee that ultimately costs you even more.
It’s typical for the cost of these paid benefits to be weighed against the amount of the new hire’s wages or salary, the size of the company hiring, the city or state where the business is located, and industry standards if any.
The Averages Costs of Employee Benefit Plans
The expectation of most employees is to receive some sort of health insurance benefits. I’m sure they rarely wonder how much does an employee cost, but in this case, the costs to the employer can be hefty.
Each situation is different so it’s up to individual employers to consider the amount they’ll end up spending in monthly premiums. Some are able—and willing—to cover 100% of the premiums while others will only pay a portion and pass the rest of the cost on to the employee.
According to data from the Bureau of Labor Statistics (BLS), the amount employers pay on insurance varies widely across industries and sectors.
Insurance can cover:
- Short-term disability
- Long-term disability
The Private Sector
Employers in the private sector should be happy that they pay the least amount per employee on health care. The average is about $2.70 per hour or nearly 8 percent of their total compensation.
- The service industry ranks lowest with employers paying $1.10 per employee per hour or 6.9 percent of their compensation
- Those in management, professional, and related positions rank at the top with employers paying $5.28 per hour or nearly 7.7 percent of compensation
- Goods-producing and service-producing industries fall in the middle with employers paying $3.74 or 9.5 percent and $2.49 or 7.6 percent of compensation respectively
It’s also worth noting that there is quite a bit of leeway in the amount spent even within industries.
The Public Sector
Starting with the public sector employers, on average, pay about $3.14 per hour per employee for all the of insurance types mentioned above. This works out to be approximately 8.7 percent of what the employer is paying in compensation.
Just as the average varies significantly across sectors, it will also vary quite a bit depending on your industry.
- Health care services employers can expect to spend an average of $4.19 per employee per hour. Or typically, about 10 percent of what you’re paying in compensation.
- Universities and colleges pay even more. In their case, the numbers ramp up to %5.90 per hour per employee—or 11.6 percent.
- Primary and secondary schools actually spend more dollar-wise on teachers at $6.73 per hour per teacher, but the average is a bit less at 11%.
- Sales professionals bottom out at the low end of cost per employer per hour at only $1.52 spent on insurance or 6.3 percent of their compensation.
State and Local Government
Employers in this sector pay even more than the two mentioned above.
In this case, the average is about $5.82 per hour per employee or 11.8 percent of their total compensation.
If your company is going to pay retirement benefits, this is another cost to consider.
These might include:
- SEP IRA (Simplified Employee Pension)
- Simple IRA
In the case of retirement savings, an employer will typically agree to match whatever the employee contributes up to a certain percentage. This typically falls into an amount around 3 – 6 % of the employees’ salary.
On top of that cost, you still need to factor in the cost to manage and administer the retirement plan itself.
Think all the above-mentioned employee cost calculations are enough?
There are more.
Each and every employer regardless of sector, industry, and location needs to consider the overhead costs of an employee. And even if you have remote employees working from home, they are still costing you overhead to some degree.
Here are some examples of typical overhead costs:
- Workspace. This could include such things as desks, chairs, floor mats, computers, cell phones, phones, phone line, office space and even more
- Office Supplies. All those pens that people take home, paper, toner, staples, paper clips and clamps
- Miscellaneous but necessary items like protective gear, tools, uniforms and more
How Much Does an Employee Cost?
If we take into consideration all the expenses mentioned above an employee who has an annual salary of $35k will be costing their employer at least $45k, likely more.
If we break that done into an hourly wage, it looks like this. An employee making $15 per hour is costing an employer $20 per hour. At least.
Employee Cost Calculator
Fortunately, employers have an easy way to figure out their potential employee cost calculation.
Just use an employee cost calculator. There are many to choose from online, but a good starting place is a QuickBooks site where they offer a number of calculators.
Whether you’re a startup or an established organization, be sure to do a labor calculation before you hire.