Why a $14/hour employee costs $20

plane_sharp_details.top.jpgWorkers at Jim Garland's aviation-services firm need FBI background checks, uniforms, health and unemployment insurance and other hidden costs that push the price tag of a $14/hour worker much higher.By Catherine Clifford, staff reporter


NEW YORK (CNNMoney.com) -- You probably cost your boss a lot more than you think you do.

For Jim Garland, who owns a corporate aircraft cleaning and support services company, a $14 per hour worker has a true cost of $19.63 per hour, or about 40% more than base pay. This so-called "loaded rate" includes fixed expenses -- federal and state taxes, health insurance, workman's compensation, uniforms, and paid time off -- along with soft costs like the time spent training a new hire.

pets_animal.03.jpg
Sam Meisler wants to bring on additional assistants for his veterinary business, but timing the hires so they pay off financially is tricky.

Washington's lawmakers are throwing a lot of ammo at reducing the jobless rate, including a new tax break for hiring the unemployed. But no matter what incentives the government offers, it's hard to convince business owners to hire until they're absolutely certain they need to. Employees are often the most expensive investment a business makes.

"Our entire existence revolves around two numbers: revenue and payroll," Garland said of Sharp Details, in Dulles, Va., which he launched out of his car trunk in 1991. Payroll for 60 workers accounts for around 70% of his firm's operating costs.

Garland outsources his entire human resource department. Joe Sherrier, director of human resources for Employment Enterprises -- the company that manages Garland's HR -- said that as a general rule, business owners should to expect an employee to cost an additional 25% to 30% on top of base salary each year.

Breaking down the numbers: Hilda Kernc has been running a Lebanese food production company out of her home kitchen near Chicago for a bit more than a year. Her vegetarian cooking is so popular that she works as many as 20 hours a day keeping up with demand for her hummus and other Middle Eastern fare.

Kernc is applying for a Illinois state business license and is about to start renting out a commercial kitchen part-time. Previously distributed under the name Hilda's Homemade Appetizers, Kernc's snacks will now be branded "Deleez Appetizers," a combination of the word "delicious" and the Arabic word that means the same.

Kernc thinks it might be time to bring on her first employee. "My husband is helping me, and we were thinking we need to hire somebody," she said. "It will kill me if I am going to work like this."

To prepare, Kernc began researching the costs.

State income taxes vary significantly, but federal taxes are standard: Social Security tax is 12.4% on the first $106,800 of earnings, and Medicare taxes run another 2.9% of all wages. The employer and employee each pay half. (The self-employed pay the full cost of both taxes themselves.)

Employers also have to pay a federal unemployment insurance tax of 6.2% on the first $7,000 of each employee's wages. Illinois adds on a state unemployment tax that's currently 3.9% for new companies on the first $12,520 of wages. (Existing companies have their rates adjusted up or down depending on how many former workers file unemployment claims.) Part of the state unemployment tax is deductible from the federal, but that still leaves employers on the hook for a tax bite.

"I can't afford it," Kernc concluded. "When I saw the price to hire somebody, at this point I can't do it."

But Kernc she also knows she can't put it off indefinitely if demand stays high. "I can't work 24 hours per day," she said.

Hidden costs: The little perks that employees come to expect, from free coffee to daycare services to group life insurance, factor into the price tag of a new worker.

"All of a sudden, by hiring a new employee, adding up all the fringe benefits, it can be costly," said Tom Ochsenschlager, a senior manager at the American Institute of Certified Public Accountants.

Sam Meisler owns two animal hospitals and a vaccination clinic in Knoxville and Alcoa, Tenn. He'd like to hire another one or two full-time assistants to work in his My Pet's Animal Hospital clinics. His company's business is growing, but still, timing the staff expansion is tricky: "What we have to try to do is anticipate the recovery," he said. "It is difficult to know when to hire."

A new hire can actually decrease sales in the short term as they learn the job. As new assistants train on their computer system, Meisler expects occasional missed charges.

"You may even lose a client or two just from miscommunication, because of the veterinarian assistant not knowing how to talk to them on the phone," he said. But on the flip side, extra administrative help gives the veterinarian more time to talk to each client and potentially sell additional services, such as grooming and dental cleaning.

A bad hiring decision can be a big hit to a company's bottom line.

"The cost of hiring the wrong person becomes incrementally more expensive the shorter period of time they have been with you. The first 90 days are typically the most expensive to have them on board," said Sherrier of Employment Enterprises. "If they stay, that is cost you can recover."

The cost of losing an employee and hiring a replacement throws complicates the "loaded rate" calculation of what a worker costs each specific business.

Garland's employees work on high-profile corporate jets, and each of his new hires has to go through a full FBI background check and drug screening. Swapping an experienced worker for a brand-new replacement that needs training sets back the team's productivity.

Washington's policy plans: Job creation "must be our No. 1 focus in 2010," President Obama said in January in his State of the Union speech.

Since then, he's let loose with a fusillade of proposals, including a $5,000 tax credit for business owners for each new hire. That didn't fly on Capitol Hill: Congress pushed back hard against so much spending in the face of a record deficit and growing national debt.

The $17.6 billion jobs bill Obama signed into law last week included a one-year Social Security payroll tax holiday on new hires that were previously unemployed -- but it's a shadow of the more aggressive hiring initiatives Obama had pushed for.

Meisler can hire an entry-level assistant for $8 to $10 an hour. At an annual base salary of around $20,000 -- plus $2,018 for Social Security, Medicare and Tennessee's typical state and federal unemployment taxes -- every extra dollar of government hiring incentive puts a new worker closer to the tipping point of paying off financially.

The $5,000 tax credit Obama talked about would have prompted him to add staff. "I am not sure whether payroll tax credit alone would do it," Meisler said. "I will probably just act like I usually do -- when we need someone, we will hire them -- but there is no real incentive at this point." To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Questions & Answers



QHow does a florist sell more in this economy? We changed our business to designing weddings and events only, as the everyday flowers are not selling. We had to throw out too much product at the end of the week -- flowers are perishable! More
Get Answer
- The Flower Lady, Suwanee, Ga.
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.28%4.26%
15 yr fixed3.30%3.30%
5/1 ARM3.35%3.30%
30 yr refi4.32%4.25%
15 yr refi3.35%3.29%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Sponsors

Sections

Alibaba's shopping sites account for 80% of online retail in China. Meet four successful merchants. More

The IRS is in damage control mode Tuesday after an audit revealed that it paid bonuses to employees who were in trouble over tax issues themselves. More

Upstart Aereo goes before Supreme Court justices in challenge by broadcasters who say TV streaming services violates copyrights. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

Student loan borrowers are suddenly being thrown into default when the co-signer on their loan -- often a parent or grandparent -- dies or files for bankruptcy. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.