Hidden Expenses

True Cost of an Employee

By Michael Baker

If you ask the head of most any law firm about the compensation for a given employee, you’ll likely hear something like “$15 an hour” or “$50,000 a year.” Of course the dollar figure is correct. But it represents only about 75 to 80 percent of total compensation. The hourly rate or base pay is just the starting point. While many industries track the cost or “burden” of an employee, numerous costs get buried and are not included in the equation.

Payroll Doesn’t Tell the Whole Story

Do you know what you’re really spending to maintain your workforce? Read on to learn about hidden costs you may not be considering, and that your employees may not know of, either.

• Medical insurance. Most employers pay a portion of single medical coverage, with very few picking up the tab for the entire family. A typical monthly premium for an individual is about $450, so let’s say you pay for 50 percent or $225 per month, or $2,700 annually.
• Payroll taxes. The combination of FICA (6.2 percent) and Medicare (1.45 percent) known as payroll taxes is non-elective and certainly one of the biggest employee costs. This tax is paid equally by the employee and the employer, with the employer’s share at 7.65 percent of compensation up to $117,000. While many employers do not consider payroll taxes a benefit, the employee does profit by drawing Social Security and using Medicare from retirement until death (or at least as long as the funds last).
• Unemployment taxes. Typical federal and state unemployment taxes are estimated at about $260 per employee per year. Like payroll taxes, they’re mandatory but can provide a benefit to an employee.
• Vacation, sick days and holidays. This is a big potential employer expense, especially when employees who bill by the hour are out. Say the person has two weeks of vacation, three sick days and seven holidays, which adds up to 20 days annually. Depending on the employee’s contribution and the ability of others to cover, it may be necessary to bring in a temp or pay overtime to cover absences.
• Retirement plan. Most employers offer some type of retirement plan. An example is a simple 401(k). An employer who contributes 2 percent of covered compensation for all eligible employees would be contributing $1,000 for an employee earning $50,000 per year.
• Long-term disability. Long-term coverage can be costly, as the risk of disability is much higher than the risk of premature death. The cost of both premium and benefit is based on salary. For employees earning $50,000 and $75,000, the annual cost of providing disability would be approximately $300 and $450, respectively.
• Life insurance. While insuring employees’ lives is not a big expense, it certainly is a sizable benefit for survivors if the employee passes away while in your employment. Group coverage cost varies by age. The price of providing $100,000 of coverage for a 40-year-old is about $100 per year.
  

Wait, Wait, There’s More

When calculating the cost of carrying an employee, you can’t forget the extras. Like birthday bagels, occasional meals to recognize achievement and, of course, the annual holiday party, gift or bonus. Just providing coffee, soft drinks and snacks can add $1 to $2 a day to the cost — that’s $250 to $500 annually per employee.

While I do not advocate pinching every penny or asking employees to pay for their own Mountain Dew, I do advise getting a firm handle on how these and other incremental expenses add up.

Doing this certainly gives you an idea of your true costs. But there’s more to it than that. Some savvy business owners share this information with employees in an annual employment letter to show that the dollar figure on the contract does not represent all that an employee is getting. Describing the full compensation package also communicates that you value your employees, and that investing in them is a core value for your firm.

It’s Your Money

That payroll line item on your budget is a familiar number. To really understand how much you’re spending, though, you’ve got to dig a little deeper. Take the time to uncover all the expenses and look at them as an aggregate.

You’ll never regret knowing the real story about where your money is going.

Mike Baker is a CPA and Managing Partner of Dent, Baker & Company. A Certified Financial Planner, Mike is a member of AICPA and the Alabama Society of Certified Public Accountants. Reach him at Mbaker@dentbaker.com.

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