SCORE is often asked to help employers determine the cost of hiring and retaining employees beyond the price of their wages. Many agencies and publications are involved in providing an answer.
(Publication 15, Circular E, Employer’s Tax Guide), indicates that you must consider:
- Social Security Tax – 6.2% each for employers and employees on wages up to and including $113,700. (As of 2/15/13)
- Medicare Tax – 1.45% each for employers and employees on all wages. See additional rate on wages in excess of $200,000 per year.
- Federal Unemployment Tax (FUTA) – 6.0% before state credits (employers only) on wages up to and including $7,000.
Tennessee’s Department of Labor and Workforce Development, Division of Employment Security indicates that during the first three years the state unemployment tax (SUTA) for new businesses on total wages up to and including $1,500.00 is: Mining – 6.2% Construction – 8.6% All Other – 2.7%.
Your state unemployment account will be experience rated after the first three full years. If you have had no unemployment claims during this period, your SUTA rate should decrease. When you pay SUTA, your FUTA rate is reduced from 6.2% to 0.8%. Businesses must pay SUTA if they hire one employee for 20 weeks in the calendar year or pay $1,500 in wages during the current or preceding calendar year. State unemployment tax is paid quarterly; penalties for late payments are severe.
If you are in the construction business, you must pay workers comp if you have even one employee. All other businesses must pay if they have five employees or more. Workers comp coverage is obtained through your insurance company. The rates depend on your type of business, and range from under 1% to as high as 30% for some types of construction businesses.
Let’s assume that you aren’t in the mining or construction business. You hire one employee who works 40 hours a week for 50 weeks for a wage of $6 per hour ($12,000 per year). Your costs would be:
Social Security (.062 x 12,000) = $ 744
Medicare (.0145 x 12,000) = $ 174
FUTA (.008 x 7,000) = $ 56
SUTA (TN) (.027 x 7,000) = $ 189
Total $1,163 / $12,000 = 9.7%
ONE MORE THING
The costs described above are those you will incur to comply with state and federal laws. They are not all the “extra” costs of having employees. Employee benefits such as paid vacations, insurance, retirement plans, and maternity leave (just to name a few) all contribute to your costs. Though most of these are optional in that you are not required to provide them, they are often necessary to attract and keep good, qualified workers. Beyond that, to make those workers as competent and effective as they can be, you may have to incur training costs. In short, when considering what your employees really cost you, don’t forget to consider the whole picture, and plan and budget accordingly.
Revision by Paul Swiderski
April 4, 2013
The material in this publication is based on work supported by the U.S. Small Business Administration under cooperative agreement SBAHG-04-S-0001. Any opinions, findings and conclusions or recommendations expressed in this publication are those of the author and do not necessarily reflect the views of the U.S. Small Business Administration. The information contained in this publication is believed to be accurate and authoritative but is not intended to be relied on as legal, accounting, tax or other professional advice. You should consult with a qualified professional adviser to discuss issues unique to your business.