By Michael McNulty
It’s a mistake that many rookie business owners make. They calculate the cost of employees without figuring in “additional” or “hidden” expenses.
Fact: When you have employees, you pay more than their salaries. There is Medicare, unemployment insurance and social security taxes. Your state may even require that you purchase worker’s compensation insurance. These “hidden” expenses may be 10 percent of your employee wages. With over 50 full-time workers, you may be required to provide health care benefits, running up your costs even higher.
FICA – Social Security and Medicare Tax
While the employee pays FICA taxes, the employer must make its own contributions based on employee wages. This figure can fluctuate.
In 2013, the required employer contributions based on employee salary were:
- 6.2 percent of to Social Security on the first $113,700
- 1.45 percent to Medicare regardless of the salary amount
Employers should send electronic payments to the IRS once monthly or semi-weekly, through the IRS proprietary system, EFTPS. See Jean Murray’s article, When do I make payroll tax deposits? for an explanation on employer filing.
Employers pay 100 percent of unemployment taxes to both the state and federal government, with a small number of exceptions at the state level. Why? Simply put: The federal government is responsible for paying any benefits the state cannot cover.
The official federal unemployment tax rate is 6 percent but may be much lower for two reasons:
- Your company gets a credit if it is current on state unemployment taxes, reducing your tax to .6 percent, less credit if your state owes money to the federal government. For an explanation, check out: States with Penalties
- Unemployment taxes only apply to the first $7,000 of income per employee. State taxes are different. See here for state specific info.
The above rates pertain to introductory rates for new employers. Depending on the industry and your company history, your rates will go up or down.
Workers Compensation Insurance
Required by all states but Texas, this insurance covers certain claims that derive from job-related illness or injury and, in most states, may be purchased through private companies.
Based on employee classification and the state where the employee is working, the average cost is typically just under 2% of the payroll, but may be higher or lower. If your employees do dangerous activities like fight fires or do heavy construction, workers compensation may approach 10 percent.
To summarize the types of “hidden” expenses you need to consider:
- Monthly FICA taxes, usually 7.65 percent of payroll.
- Quarterly unemployment taxes; state taxes around 1 percent of employee expenses and federal a maximum of $105 per employee.
- Workers compensation insurance, everywhere but Texas, mostly through private companies based on state guidelines.
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Michael McNulty is a staff writer for Fit Small Business. Previously, Michael was the co-founder of the popular website Opposing Views.