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NEW YORK (CNNMoney.com) — You probably cost your boss a lot more than you think you do.
For Jim Garland, who owns a corporate aircraft cleaning and support services company, a $14 per hour worker has a true cost of $19.63 per hour, or about 40% more than base pay. This so-called “loaded rate” includes fixed expenses — federal and state taxes, health insurance, workman’s compensation, uniforms, and paid time off — along with soft costs like the time spent training a new hire.
Washington’s lawmakers are throwing a lot of ammo at reducing the jobless rate, tax breaks for hiring the unemployed. But no matter what incentives the government offers, it’s hard to convince business owners to hire until they’re absolutely certain they need to. Employees are often the most expensive investment a business makes.
“Our entire existence revolves around two numbers: revenue and payroll,” Garland said of Sharp Details, in Dulles, Va., which he launched out of his car trunk in 1991. Payroll for 60 workers accounts for around 70% of his firm’s operating costs.
Garland outsources his entire human resource department. Joe Sherrier, director of human resources for Employment Enterprises — the company that manages Garland’s HR — said that as a general rule, business owners should to expect an employee to cost an additional 25% to 30% on top of base salary each year.
Breaking down the numbers: Hilda Kernc has been running a Lebanese food production company out of her home kitchen near Chicago for a bit more than a year. Her vegetarian cooking is so popular that she works as many as 20 hours a day keeping up with demand for her hummus and other Middle Eastern fare.
Kernc is applying for a Illinois state business license and is about to start renting out a commercial kitchen part-time. Previously distributed under the name Hilda’s Homemade Appetizers, Kernc’s snacks will now be branded “Deleez Appetizers,” a combination of the word “delicious” and the Arabic word that means the same.
Kernc thinks it might be time to bring on her first employee. “My husband is helping me, and we were thinking we need to hire somebody,” she said. “It will kill me if I am going to work like this.”
To prepare, Kernc began researching the costs.
State income taxes vary significantly, but federal taxes are standard: Social Security tax is 12.4% on the first $106,800 of earnings, and Medicare taxes run another 2.9% of all wages. The employer and employee each pay half. (The self-employed pay the full cost of both taxes themselves.)
Employers also have to pay a federal unemployment insurance tax of 6.2% on the first $7,000 of each employee’s wages. Illinois adds on a state unemployment tax that’s currently 3.9% for new companies on the first $12,520 of wages. (Existing companies have their rates adjusted up or down depending on how many former workers file unemployment claims.) Part of the state unemployment tax is deductible from the federal, but that still leaves employers on the hook for a tax bite.
“I can’t afford it,” Kernc concluded. “When I saw the price to hire somebody, at this point I can’t do it.”
But Kernc she also knows she can’t put it off indefinitely if demand stays high. “I can’t work 24 hours per day,” she said.
Hidden costs: The little perks that employees come to expect, from free coffee to daycare services to group life insurance, factor into the price tag of a new worker.
“All of a sudden, by hiring a new employee, adding up all the fringe benefits, it can be costly,” said Tom Ochsenschlager, a senior manager at the American Institute of Certified Public Accountants.
Sam Meisler owns two animal hospitals and a vaccination clinic in Knoxville and Alcoa, Tenn. He’d like to hire another one or two full-time assistants to work in his My Pet’s Animal Hospital clinics. His company’s business is growing, but still, timing the staff expansion is tricky: “What we have to try to do is anticipate the recovery,” he said. “It is difficult to know when to hire.”
A new hire can actually decrease sales in the short term as they learn the job. As new assistants train on their computer system, Meisler expects occasional missed charges.
“You may even lose a client or two just from miscommunication, because of the veterinarian assistant not knowing how to talk to them on the phone,” he said. But on the flip side, extra administrative help gives the veterinarian more time to talk to each client and potentially sell additional services, such as grooming and dental cleaning.
0:00 /2:24Treat employees like family
A bad hiring decision can be a big hit to a company’s bottom line.
“The cost of hiring the wrong person becomes incrementally more expensive the shorter period of time they have been with you. The first 90 days are typically the most expensive to have them on board,” said Sherrier of Employment Enterprises. “If they stay, that is cost you can recover.”
The cost of losing an employee and hiring a replacement throws complicates the “loaded rate” calculation of what a worker costs each specific business.
Excerpted from CNN Money – By Catherine Clifford, First Published: March 26, 2010