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After New Law Changes, What Does An Employee Really Cost You?

After New Law Changes, What Does An Employee Really Cost You?

By BarbaraWeltman, Guest Blogger
Published: April 15, 2010 Updated: September 21, 2016

If your business is recovering or expanding and you need to hire new people or re-hire former employees, budget for the true cost of each additional employee. Wages are;t your only cost. There are various payroll taxes, employee benefits, and hidden costs that can jack up the cost for adding a worker. And new laws may provide tax reductions- or additions -- for staffing up.


Tax and other costs
An employe-s base pay, whether an hourly rate or a fixed salary, is only a portion of the total cost to the company. Increase the base pay by any additional wages or bonuses, as well as employment taxes, insurance, and employee benefits. As a rule of thumb, figure 25% to 30% of base pay, so if you are paying $40,000, the true cost to you is probably $50,000 or more.


Additional pay. Paid time off is a cost to the company without any productivity to show for it. Paid time off can include vacation pay, sick leave, and personal days. Additional pay can also include bonuses, awards, and other types of payments.


Employment taxes. There are federal and state employment taxes that are the employe's responsibility, including:


FICA and FUTA are explained in IRS Publication 15, Employe's Tax Guide. Find state unemployment tax information through the U.S. Department of Labor.


Insurance. There is certain mandatory coverage, including:


With few exceptions, employers are not currently required to pay for employee health coverage. However, starting in 2014, under the historic Patient Protection and Affordable Care Act signed into law on March 23, 2010, companies with 50 or more employees will be required to provide health coverage; smaller firms are exempt.


Employee benefits. While small businesses aren't required to provide employee benefits, many do as a way to compete in the workplace for attracting and retaining qualified workers or because they think it's the right thing to do. Employee benefits, such as employer contributions to retirement plans or educational assistance, usually are fully deductible by the company, which helps defray some of their cost. You can view an extensive list of employee benefits you can offer and the payroll tax implications to you in IRS Publication 15-B, Employer's Guide to Fringe Benefits 2010.


Other costs. There may be additional costs, some of which aren't easy to calculate. For example, you may have to pay for the training of a new employee. Your administrative costs for handling payroll may rise, especially if you use an outside payroll service. And there may be costs to the company for uniforms, protective gear, tools, and other items provided to a new employee.


Tax savings
New laws (the Hiring Incentives to Restore Employment (HIRE) Act and the Patient Protection and Affordable Care Act) provide some tax incentives for small businesses to hire workers and provide health coverage. These new tax breaks include:


Payroll tax relief. If you hire a worker after February 3, 2010, and before January 1, 2011, you do not have to pay the employer share of Social Security taxes on wages paid after March 18, 2010, which is a 6.2% savings on wages up to $106,800. Relief applies only to a worker who certifies that he or she was unemployed during the 60 days before beginning work or worked fewer than a total of 40 hours for someone else during the 60-day period. You can rehire someone who previously worked for you; related employees and owners do not qualify.

You still owe the Medicare portion of FICA and must withhold the full share (Social Security and Medicare taxes) from employee wages.


Tax credit for retaining workers. If you retain a worker that entitles you to the payroll tax relief (above) for 52 weeks, you can claim a tax credit of $1,000 on your 2011 tax return. There is no limit on the number of retained workers eligible for this credit. The credit is part of the general business credit, which has annual limitations. Look for information about payroll tax relief and the tax credit for retaining workers from the IRS.


Small business health tax credit. For firms with up to 10 employees that pay for employee health insurance, there is a tax credit of 35% of total premium costs. The credit, however, applies only if the average annual pay of full-time employees is not more than $25,000. The credit can be claimed in 2010 through 2013. Starting in 2014, the credit rises to 50%, but applies only to coverage purchased through a State exchange, and only for two years. The credit percentage is reduced for firms with 11-25 employees with average annual pay of full-time employees up to $50,000.


Besides new tax incentives, employers may qualify for the work opportunity credit for hiring an employee from a disadvantaged targeted group. The credit generally is 40% of qualified first-year wages up to $6,000, for a credit per eligible employee of $2,400. For 2009 and 2010, there are two new targeted groups: unemployed veterans and disconnected youth. Find more information about this tax credit from the IRS.


Net result
It makes sense to hire a worker when you anticipate that he or she will help your business more than the worker costs. Often, this isn't a decision based solely on dollars and cents. You can have your CPA or other financial advisor help you work out the numbers, but it's up to you to decide whether growing your payroll is the right business decision.



Barbara Weltman, attorney, trusted small business advocate, well-known author, with titles such as, JK Lasser's Tax Law Simplified 2010, radio show host of Build Your Business Radio and publisher of Big Ideas for Small Business® newsletter and Idea of the Day®.

About the Author:

Barbara Weltman

Guest Blogger

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.