If you are a business owner you have probably weighed the pro’s and con’s of hiring a full-time employee vs. contracting labor for specific jobs. In this article we wanted to put some math behind this argument to help you fully understand the true cost of hiring an employee.
Hiring a full-time employee vs. Contract Labor
When considering hiring an employee there are many factors that must be considered- are they a good fit? Do we have enough work for them? Will I be able to afford a full-time hire? The last question is the one we would like to look at in this article.
The monetary impact of an employee is far greater than simply the cost of paying them for their services. There are a plethora of additional fees and hidden cost that you must also consider- the largest of these are payroll taxes. Payroll taxes, including FICA tax, are what an employer deducts from an employee’s pay and sends to the IRS, state or other tax authority on their behalf. Here are the key factors, and why it’s important to monitor your withholding tax.
What is FICA tax?
FICA tax is a combination of a 6.2% Social Security tax and a 1.45% Medicare tax the IRS imposes on employee earnings. For 2019, only the first $132,900 of earnings is subject to the Social Security part of the tax (in 2020, it’s $137,700). A 0.9% additional Medicare tax may also apply if earnings exceed $200,000 if you’re a single filer or $250,000 if you’re filing jointly. Typically, employers deduct FICA tax from employee paychecks and remit the money to the IRS on behalf of the employee. FICA stands for Federal Insurance Contributions Act.
Social Security tax (aka OASDI) 6.2% Medicare tax 1.45%
| Total | 7.65% |
When to Consider Hiring an Independent Contractor
- The work is not central to your business; for example, cleaning the offices or running your computer system is outside the scope of your business mission.
- The work can be done by a professional who doesn’t need much supervision
- The work is a short-term project that will be completed in a defined period of time
- The worker has professional expertise or is someone who needs little supervision.
great illustration from beebole: https://beebole.com/blog/how-to-calculate-the-real-cost-of-an-employee/
| Annual cost of an employee |
|
|
| BASE SALARY | $30,000 | $70,000 |
| Total FICA, FUTA, SUTA and workers’ comp | $3,273 | $7,581 |
| Total benefits | $8,600 | $9,600 |
| Total annual cost | $41,873 | $87,181 |
According to our findings, we would need to pay $41,873 for an employee with a base salary of $30,000, which means we need to add to that base salary $11,873 to cover taxes and benefits. That amount is about 28% of the total annual cost, which is close to the upper end that Hadzima ($42,000) and Pagliery ($40,541) estimate for a base salary of $30,000.
On the other hand, the real annual cost of someone with a base salary of $70,000 would be around $87,181, which means a percentage of 24% of total compensation in taxes and benefits to pay for that employee. That number is closer to the lower part of the ranges that Hadzima ($87,500) and Pagliery ($85,366) estimate for that base salary, which confirms the fact that the higher the salary, the lower the percentage employers end up paying on top of the base salary.
Your trusted Employment Agency
Labor works is a Staffing agency dedicated to finding you the right employee. In addition to our No-Show guarantee, we ensure the safety and training of all of our temporary laborers. As an employment agency Labor Works seeks to meet more than what is expected. We seek to break the mold of temporary employment by providing temp workers who are qualified and respected professionals.
We take full responsibility for worker’s compensation insurance, federal and state taxes, FICA and unemployment. Your entire temporary labor payroll consists of one check to Labor Works.
Experienced Temporary Laborers
Whatever the industry we have a laborer who can fill your job. Staffing is often a problem for suppliers and manufacturers where demand may change from day to to day. We have the ability to dispatch staff on a moments notice who are ready and capable to meet your staffing needs. Temporary staffing doesn’t need to be difficult, call Labor Works today and fill your temporaries today.