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Understanding the Total Cost of an Employee (And Why It’s Money Well Spent)

As often as your employees are busy thinking about how much they make, how often do they think about how much they cost? Paying to staff your business goes well beyond writing paychecks. You have to train your employees well, offer them competitive benefits and handle all of the other expenses that come with providing a productive environment.

Knowing the total cost of an employee at your small business is critical to making good hiring decisions — and it can also help you quantify the value of good employee retention. Here are the costs you should look at when figuring out how much you’re spending on your employees — and how to determine whether it’s too much. (Hint: It’s actually probably not.)

What Goes Into an Employee’s Total Cost?

Since every business is different, there’s no single formula for determining an employee’s total cost, but there are a few employee expenses that should come into play for most business owners.

After salary, health insurance is one of the largest factors to play into the total cost of an employee. It’s best to look to your own plan to see how much you pay for your employees’ health insurance, but in 2018, for each employee, employers paid on average $5,711 in premiums for single coverage and $14,069 in premiums for family coverage. Employers also have to budget for payroll taxes, which can set you back 6.2 percent of an employee’s wages for Social Security and 1.45 percent for Medicare.

Other factors may or may not apply to you, depending on what your business looks like. For instance, do you:

  • Offer employees commission?
  • Match employees’ 401(k) contributions?
  • Provide an employee pension plan?
  • Offer any fringe benefits?
  • Give employees cell phones, laptops or other technology?
  • Provide free snacks or drinks for employees?

Whether you offer your employees meditation rooms and volleyball courts or just stick to the basics, the costs can add up. Plus, all of that is just for the employees you keep from year to year. Whether you’re replacing a former employee or expanding your workforce, bringing in new hires can come with more expenses. A lot of time, effort and money goes into recruiting, hiring and onboarding, and the process of bringing in someone new and training them can cost an employer the equivalent of up to nine months’ worth of their salary.

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Why Is Investing in Employees Worth It?

Once you’ve added everything up, try not to let the number bug you. Whether it’s just about what you expected or higher than you’d feared, you probably wish you were spending less. That could be a mistake. Spending money on employees isn’t just necessary — it’s an investment. Hiring on a shoestring budget that doesn’t account for all of your expenses is likely to lead to higher turnover — and you’ll end up spending more money struggling to keep or backfill your talent than you thought you were saving on benefits.

Offering health and voluntary benefits can be a key way to retain employees. Across every generation, employees look for benefits when job searching, and almost 80 percent of employees say they would rather see an increase in benefits than a higher salary.

Small business owners can’t help but worry about money. A dip in revenue or an unexpected expense can threaten the stability of an entire company. But when figuring out the total cost of keeping your employees — factoring in salary, the average cost of small business health insurance and everything else you spend money on to make your employees happy and productive — stop and think before slashing your employee expenses.

Keep the total cost of your employees in mind as you grow your business. Budget for the long haul, and think about retention even before onboarding begins. Some things aren’t worth the money, but your employees definitely are.

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