An ideal employee will either make you money, or save you money. But first, you need to figure out if you can afford to take on an employee by asking yourself some questions:
- What is the total cost of hiring an employee?
- Does your business have enough cash to hire an employee?
- How will you determine the ROI of your employee?
Here’s how to answer these questions.
It’s time to think about hiring if…
- You’re turning customers away
- You’ve identified new revenue streams but can’t take advantage of them
- You’re having trouble managing your workload
- You can’t find time for personal time, vacations, or even weekends
- You need someone with specialized skills
If the above scenarios have you nodding your head, it may be time to hire. The next step is to determine whether your business has the actual dollars and cents it will take to hire a new employee.
The total cost of hiring a new employee
Paying wages is the most obvious cost of hiring a new employee, but it’s not the only cost. This is especially true when hiring your first employee: you’ll need start dealing with things like remitting payroll tax and covering worker’s compensation. See our guide to hiring employees smoothly for more tips.
As an employer, you’re required to:
Set up payroll tax
You are required to make certain tax payments to the IRS on behalf of your employee, including a portion of their income, Social Security tax, and Medicare tax. If your state has income tax, you may be required to remit tax to your state’s Department of Revenue, too. There are a lot of pitfalls when it comes to dealing with payroll and employment taxes, and you will likely want to hire a payroll service to deal with this. Be sure to budget for that, too.
Register for and pay unemployment tax
Contact your state’s Department of Labor and register to pay unemployment tax. The tax you pay here goes to your state’s program to help workers who have lost their jobs. The IRS requires most employers to report the unemployment tax paid on Form 940 every year.
Buy worker’s compensation insurance
Worker’s comp is required should an employee be injured on the job. But before you add this to your cost, check with an accountant, insurance pro, or your state’s Department of Labor, because some states do not require very small employers to hold this insurance.
Sometimes, you need to offer health insurance to attract the right candidate. You may also choose to offer competitive benefits such as a 401(K). Be sure to check the administrative costs associated with employee benefits and perks before you hire.
The United States Bureau of Labor and Statistics (BLS) keeps track of the cost to employers of hiring and maintaining employees. As of June 2018, wages and salaries accounted for 68.3% of the cost of maintaining and employee, while benefits accounted for the remaining 31.7%. This means it’s always a good idea to budget an extra 30% on top of the wages you plan to pay your employee. For more on the average cost to maintain an employee, you can find a link to the latest labor cost statistics here.
Finding the right candidate costs both time and money. Build some padding into your new hire budget for online ads, job fairs, and time spent evaluating candidates.
Unless you’re incredibly lucky, a new employee will need ramp-up time and training. It’s not a hard cost (unless you need to buy things like a new laptop or ergonomic chair). But it is an opportunity cost: what would you have normally spend those few weeks doing?
How to know if you’re financially ready for an employee
Now that you know the costs of hiring, it’s time to do some calculating.
Step one: Create a budget
Take the above costs of hiring and factor them into your annual budget. If you already have a business budget, then you’re one step closer to making a decision on hiring. If you don’t, check out our How-To Guide for Creating a Small Business Budget.
Step two: Forecast your revenue
Here’s the fun part—project how much more revenue you think you’ll earn with a new employee. New product lines, more billable hours, whatever makes sense for your business.
Stay on the conservative side, just to be safe. And don’t forget to account for your new employee’s ramp-up time.You may not be able to add that new service in your employee’s first month on the job.
Step three: See what expenses you can cut
Your new hire may also mean you can give up expenses like contractors or outside services.
If you’ve put together your budget, you’ve got the cash flow to pay a salary, and the new revenue of an employee outweighs the additional cost, then congrats! It’s time to write a job description.
If you can’t afford an employee
Sadly, sometimes your forecast tells a different story. That’s okay, there are other options.
Hire a contractor
Hiring an experienced contractor will have a higher hourly cost than an employee, but you’ll save by paying them for less hours, no benefits, and far less onboarding time.
A part-timer carries a lot of the same benefits of a full-time employee, without the same expectation for full-timer benefits. It can also be a lower-risk way to evaluate someone for a full-time role.