Understanding the Cost of Hiring a New Employee

Behind every successful business is a talented team, but employers often hesitate to hire new employees because of the cost. However, this cost goes beyond paying workers a salary. Businesses also have to consider recruiting, training, benefits, and workplace integration costs.

Many of these costs add up over time, so they often go unnoticed by employers.

The Variables That Impact Employee Cost

If you’re looking for a strict number regarding how much hiring an employee costs, you’re going to be disappointed. There are far too many factors that impact employee hiring costs, but you can use these variables to come up with an estimate.

These hiring variables include:

• Industry: Industry norms affect compensation, among other things. For instance, if it’s normal to offer paid health insurance in your industry, you’ll have to provide that to stay competitive.
• Location: Government-mandated minimum wage, state and local taxes, market supply, cost of living, and worker’s laws will greatly impact the cost of hiring workers.
• Role: A senior or high-level role will be more expensive to fill than a junior-level role, and it goes beyond salary. It takes longer to find a quality employee for a senior-level role.
• Turnover Rate: It costs 30% to 400% of an employee’s annual salary to replace them. If your turnover rate is high, you pay more to recruit employees overall.
• Market Conditions: If a skill is rare or we’re currently in a candidate’s market, you’ll need to improve your compensation package to attract the best local talent.
• Company Size: It’s cheaper for larger companies to hire new employees because a single employee in a larger company will perform more duties or oversee more people.
• Remote Work: An in-office employee is more expensive to hire because you need to factor in building-based overhead costs, such as rent, utilities, and office supplies.

While these variables are more difficult to account for, you can more easily determine these costs if you keep track of your hiring data. This data will eventually lower your hiring costs.

The Factors That Play Into Employee Cost

Now that you have an idea of what other variables could potentially impact employee costs, you can look at factors that always play a role. Here are the factors that play into employee costs.

Base Compensation

The most obvious cost of a new employee is their salary. Base compensation is a person’s base salary or hourly wage. It typically makes up the largest part of an employee’s cost, but it’s far from being the only cost. A worker that acquires a lot of overtime will cost significantly more.

Payroll Taxes

Business owners are responsible for paying different types of payroll taxes if they hire employees. These payroll taxes include FICA, FUTA, state, local, and unemployment taxes.

• Federal Insurance Contributions Act (FICA): FICA covers Social Security and Medicare taxes for employees. As of 2023, the FICA rate for employees is 6.2% of taxable wages for Social Security and 1.45% for Medicare, for a total of 7.65%.
• Federal Unemployment Tax Act (FUTA): FUTA helps pay for benefits for unemployed workers. Employers pay 6.0% on the first $7,000 of taxable wages per employee if an employee is paid more than $1,500 in a year. Some employers qualify for 5.4%.
• State and Local Taxes: Employers are taxed differently depending on the city, state, or jurisdiction they live in. (If you’re curious, North Carolina has the lowest corporate tax rate in the country, which is a flat rate of 2.5%. They’re also looking to phase out this tax.)
• State Unemployment: State unemployment rates also vary by state. (North Carolina also has the lowest tax rate in this bracket. Massachusetts has one of the highest.)

Worker’s compensation is a non-negotiable tax you pay to protect your workers. Riskier jobs will incur higher worker’s compensation costs (i.e., landscaping, painters, medical employees).

Benefits

Benefits do a lot to attract and retain employees, but there’s no denying they come at a cost. Health insurance is the biggest cost in this area, but it depends on what health plan you choose. On average, employers pay $6,440 to $16,253 per year per employee in premiums.

Additional insurance, such as dental, life, and disability insurance, comes at a lower cost than health insurance but can get expensive quickly if you’re insuring more than 50 employees.

Employers who match retirement plan savings may spend an extra $2,000 to $5,000 per year, depending on that employee’s salary. Paid vacation time andc sick days are other expenses. But in the end, paying for these benefits costs less than replacing employees.

Hiring and Training

Hiring and training include several employee-based costs, and many of them can’t be left on the table. If you phone in the hiring and training process, you’re increasing your chance of turnover. This cost will range depending on if you’re hiring internally or through an agency.

Either way, businesses will have to pay for the following:

• Recruitment Software and ATS Software
• Salaries for Your HR Department
• Fees for Job Postings
• Background Checks
• Onboarding Costs
• Training and Cross-Training

As mentioned, smaller companies will pay more to hire and train employees. The hiring and training process is only successful if you can train the new employee to be 100% productive.

Workplace Integration

Workplace integration is one of the most overlooked costs of hiring. However, if a new employee doesn’t get along with their peers, it could drive them to quit. A toxic culture pushes people out, but an inclusive, communicative, and inspiring culture will keep quality employees around.

Integration expenditures may change depending on the employee’s needs. For instance, if an employee develops carpal tunnel syndrome, they’ll need physical adjustments to their work desk. If an employee recently lost a family member, they will need time off and a reduced workload.

In Conclusion…

No matter your industry, location, or company size, hiring a new employee is going to be expensive. But answering the question “how expensive” requires a lot of research on the business’s part. Once you know the true cost of hiring, you can work it into your budget.

Authors

Jess Perkins

Jess helps ambitious SaaS companies with growth hacking initiatives to help rapidly scale their inbound leads and customer base. She specializes in content marketing, SEO and paid advertising.