You’ve run the numbers and you know how much you can pay your new hire — but did you know that standard wages and salaries only represent approximately 70% of the total costs of compensation for each employee?
The other 30% comes from benefits like paid time off, health insurance and retirement plans. And this is just the breakdown of compensation and benefits. Entrepreneur estimates the average cost of recruiting, hiring and training a new employee is $4,000, with basic onboarding alone coming in at $400 per employee.
These numbers aren’t meant to scare you away from hiring employees — the intent of this piece is to help provide insights on the costs you can expect to incur as an employer.
There are many tangible benefits to hiring employees, such as building a team of individuals dedicated to helping your business succeed. However, just like any investment, you need to make informed decisions based on actual costs of employment.
Why There’s More to a Paycheck Than Salaries and Wages
As an employer, when it comes to paying employees, you will be responsible for federal, state and possibly even local payroll taxes. Payroll taxes, also known as employer taxes, must be applied to every employee — every time you run payroll.
Federal Income Tax
Employers must withhold (take out) federal income tax every time an employee is paid. The amounts are determined by annual tax tables issued by the Internal Revenue Service (IRS). These amounts must then be paid on a regular basis to the IRS.
State Income Tax
Most states (with the exception of Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) also require that the employer withhold state income tax from every paycheck.
Local Income and Employment Taxes
Depending on where you do business, you may also be subject to local income and employment taxes, such as payroll, transportation and education taxes. These items must also be withheld from every paycheck.
Federal Insurance Contribution Act (FICA) Taxes
These are the deductions for Medicare and social security — the costs of which are split evenly between the employee and the employer.
- For Medicare, the employer withholds 1.45% of the employee’s taxable earnings and contributes an additional 1.45%. (Employees earning over $200,000 pay an additional 0.9%. The employer is not responsible for additional contributions at this level.)
- For social security, the employer withholds 6.2% of the employee’s taxable earnings and contributes an additional 6.2% up to maximum taxable earnings of $127,200.
Federal (FUTA) and State (SUTA) Unemployment Taxes
Both of these taxes are 100% employer-paid. The FUTA rate is 6% on the first $7,000 in wages, and SUTA rates vary by state. However, the good news is that the amounts paid in SUTA taxes are credited toward FUTA taxes. Thus, employers can claim up to a 5.4% credit for FUTA (bringing the rate down to 0.6%) as long as the SUTA taxes were paid on time.
Workers’ Compensation and Disability Insurance
While workers’ compensation insurance requirements vary by state, employers are responsible for paying the premiums. California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island also require disability insurance.
In addition to withholding and contributing to payroll taxes, employers must also regularly remit (pay) and report these funds to the appropriate tax authorities. Income and payroll tax amounts are also listed in year-end documents, like employee W-2s.
Where to Find More Payroll Tax Information
This interactive payroll tax map from Wagepoint lets you select a state, then scroll down for detailed labor and tax information that directly affects your payroll. For an overview of how payroll taxes work, read this comprehensive guide to payroll taxes.
Managing Administrative Costs
With all of the compliance requirements, the simple act of running payroll can become complex and time-consuming. This is where payroll automation software can help. It’s a tool that businesses can use to streamline basic wage and salary calculations, along with all the compliance components. Many small business payroll providers also integrate with other business applications to further simplify your accounting and bookkeeping processes.
A Bit of a Silver Lining
(Good things come to those who wait and read all the way to the end of an article.) While it may seem like a lot, with tools like Wagepoint, your payroll process can be manageable. Also, as a business, your payroll tax contributions, related accounting and bookkeeping fees, and even your payroll provider fees are considered tax-deductible business expenses.
Blogmaster, content expert and marketing guru at Wagepoint, Michelle is having fun (seriously I am) extolling the virtues of small business payroll and generating articles with actionable advice for small businesses and startups. Michelle probably needs to get out a little more often.