How Much Does It Cost to Hire a New Employee?
June 11, 2019 | Last Updated on: March 30, 2023
June 11, 2019 | Last Updated on: March 30, 2023
Consider the following scenario for a minute. Your business is growing: You’re putting in hours a day, and you’re feeling overwhelmed. After looking at your current revenues and profits, you think you might have enough to hire an employee.
But then you get nervous. What exactly does hiring and onboarding a new employee entail? How much will you spend on various recruiting costs? How does paying into Social Security work? Do you have to provide health care? Are there any other benefits that you must offer them? How can you make sure you find the right person?
All of these are valid, and very important, questions.
In this article, we’ll address all these questions and more as we look at the ins and outs of hiring a new employee: what you need to do, and how much it will cost.
The first thing you will want to do when hiring a new employee is making sure you have an employer identification number (EIN) from the Internal Revenue Service (IRS).
If you did not receive one of these when you first filed for the formation of your business, you’ll need to file form SS-4 with the IRS.
Once you decide to hire employees, your business will need to register with your state’s Labor Department. This allows the state to keep track of the businesses that are employing workers. It will also enable the state to tax businesses for unemployed workers’ compensation, which we’ll address later on.
Many businesses provide employees with a series of benefits as part of their employment. While benefits are often seen as exclusive to larger companies, they can help give your business a leg up, even if you own a small business.
Offering benefits can be particularly helpful in acquiring quality, top talent and beating out the competition in the hiring process. Offering your employees benefits, such as 401(k) plans, can also provide your business with substantial tax deductions, further lessening the cost of offering these plans.
To hire a new employee you will have to get the word out about the job opening. While posting a sign that says “now hiring” on your storefront window can certainly be helpful, this isn’t always an effective way to let people know. Typically, you’ll want to post the opening on popular job boards.
Writing a posting can be difficult. You’ll want to make sure that you are detailed in your job description and listing what exactly you are looking for in a new employee. Remember, to attract the top talent for a particular position, you have to make sure people reading the job listing understand the job and its circumstances.
Consider describing the work environment and the ideal traits for your ideal employee, and make sure to bullet point the key skills required and the key responsibilities your new hire will have. Most businesses don’t include the employee’s salary in job postings but do what works best for you.
Many job listing boards are now free or offer a certain number of free postings, so you’ll want to research the best job boards for your business, and then consider pricing. LinkedIn and Glassdoor are great places to start as they are very popular amongst job-seekers.
Another place you can consider searching for employees is at career fairs. These are a great way to find a lot of candidates in a short period and all in one place. Then, once you’ve made the initial contact, you can set up follow-up interviews and conversations before making any definite hiring decisions.
Additionally, remember to keep an open mind as to who you are looking to hire. For example, there has been a growing trend in recent years for businesses to focus on hiring young employees exclusively with the idea of bringing fresh, youthful opinions and perspectives to the workplace. However, older workers often have more experience and better workplace temperaments. So don’t move too fast to discount them.
Having employees is a big responsibility. Having a dedicated place for personnel files will enable you to keep important documents organized. This includes employee resumes and applications, IRS forms, and other personnel materials, such as employee comments, suggestions, complaints, and co-worker disputes.
Essentially, a dedicated place for personnel files should have everything you need to manage the human resources (HR) aspect of your business. If you have a hiring manager or dedicated HR professional, which is usually only the case for larger businesses, they will be in charge of these documents.
It is always a wise decision to complete a background check on a potential employee. This will allow your business to identify any potential red flags, such as criminal history, that the candidate may have. However, you should be aware the that Fair Credit Reporting Act (FCRA), an important piece of federal legislation, places limits on employee background checks. The biggest regulation from this act is that if your business decides to use a third-party company, you must first notify and receive the consent of the potential employee. If you decide to call a former employer for an employee referral or other information, you are not required to notify the potential employee as long as your business is inquiring.
Many states require that employers carry worker’s compensation insurance. This is insurance that your business holds if an employee is injured on the job. If this happened, the insurance would kick in to provide wages, and often medical benefits, for the injured employee. Worker’s compensation insurance is often two-fold and includes some form of liability insurance for the business. This insurance will protect employers against lawsuits for up to a certain monetary amount.
Depending on the size of your business, some states will not require your business to have worker’s compensation insurance.
The last thing you would want is for an employee to get hurt on the job. The best ways to prevent this are proper training and safety guidelines. By outlining proper procedures for employees, you can help ensure they know exactly what to do in any situation. These guidelines are particularly important for businesses in fields like construction, home renovation, and other occupations that can involve serious safety hazards.
Additionally, many businesses have employee handbooks. These outline expectations for employees and detail workplace environment standards.
To get an idea of what you should be writing in your safety guidelines and employee handbook, make sure to research and read some of the many examples available online. While some of the details may seem obvious, they can still be important not just for maintaining a positive and safe working environment, but also for limiting your business’s liabilities further down the road.
One of the unique aspects of small businesses is how much contact owners have with their employees. Unlike in big corporations, the owner or owners leading a small business will often be working and interacting closely with every employee. As a small business owner, you should consider the importance of setting a good example for your employees. It’s all about leadership.
The wage or annual salary you pay an employee does not represent the total cost your business will have to shoulder to have an employee. Not only do employees cost money to train, but there are also several different tax programs you will have to pay into as an employer. In this section, we will cover all the external costs outside of an employee’s wage that come with hiring new workers.
In 2017, the Society for Human Resource Management (SHRM) found that the average cost per hire for businesses was $4,425 and the median cost was $1,633. Of these two numbers, the median hiring cost is often considered a more accurate representation of the real cost on account of the impact larger individual costs can have in skewing the average cost per hire value.
The cost per hire value is the amount of money a business spends on hiring a new employee. This value includes several different factors, including job posting fees, third-party recruiters, advertising costs, and background check fees.
Another important cost associated with hiring new employees is training cost. The cost of training an employee can be expensive, depending on how long it will take and how much of your time, or another employee’s time, will have to be devoted to the process. Training costs can be particularly relevant if your business has a low employee retention rate, meaning your business has to frequently hire and train new employees.
While an employee only needs to be trained once, making it a one-time cost for each employee, a high employee turnover rate could result in your business having to shoulder the same costs over and over again.
If your business pays more than $1,500 in employee wages in a single year, your business will be responsible for paying federal unemployment taxes, as mandated by the Federal Unemployment Tax Act (FUTA). Employers pay into this to fund payments to unemployed workers throughout the United States.
The way FUTA works is that your business will be responsible for paying 6.0% of the first $7,000 you pay each employee each year. However, since most states also have a similar program in place, you’ll be eligible for up to 5.4% in deductions. If you qualify for the maximum deduction, your business will only be responsible for paying the federal government 0.6% of the first $7,000 you pay each employee. To pay this tax, you will have to file Form 940 with the IRS annually.
To understand the deductions you qualify for and the requirements placed on your business by your state, you should seek out a qualified tax professional for guidance.
Another big fee associated with having employees is Social Security and Medicare taxes. As an employer, you will be required to pay into Social Security for each of your employees at a rate of 6.2%, with a cap of $132,900 for the year 2019. As for Medicare, you will be required to pay 1.45% of each employee’s wages.
As an employer, you will also be responsible for withholding portions of your employees’ salaries for federal income taxes, Medicare, and Social Security.
To find out how much your business should be withholding, you should have your new hires fill out a W-4 form. This will allow your employee to inform you of what allowances they are claiming. Your withholdings will then need to reflect this information.
Your business will also be responsible for withholding Social Security and Medicare taxes from your employees’ salaries. Currently, Social Security taxes are 6.2% of up to $132,900 of an employee’s salary. As mentioned above, your business will have to match this contribution. Your business will also be required to withhold 1.45% of each employee’s wages for Medicare.
Whenever you hire a new person, there is always a great deal of new paperwork to be filled out and filed.
Besides the W-4 mentioned above, you will also need to fill out an I-9 form. The I-9 form, also known as the Employment Eligibility Verification Form, is required by U.S. Citizenship and Immigration Services (USCIS). This form is used for verifying an individual’s eligibility to work in the United States and must be completed by both the employee and the employer. It is the employee’s job to present the employer with proper documentation.
It is important to note that while the I-9 form does not need to be submitted to USCIS, it must be kept available for review by federal officials at all times. This is another form that should be kept in your personnel files for safekeeping and easy access.
For more information on the I-9 form and corresponding requirements, including the documents and their instructions, you can visit the USCIS site.
Another agency you will typically be required to report new hires to is your state’s new hire reporting agency. While this agency varies from state to state, the main goal of the agency is to locate parents who owe child support.
The federal government and many states require employers to post notices about employees’ rights as guaranteed by federal and state laws; these notices are to be posted in areas visible to employees, such as in break rooms. The Department of Labor’s Poster Advisor keeps track of poster requirements so that businesses can keep up to date with any changes.
Hiring new employees can be a big challenge for small business owners. Whether it is identifying all the fees associated with maintaining employees or simply finding the right person, the hiring process is a challenge from day one.
However, at the same time, hiring your first employee can be an exciting step in growing your business. It can lead to bigger and better things down the road.