Hiring Your First Employee: What Does It Really Cost?
Your business is growing and you're ready to hire some help. That's great—but before offering someone $25 an hour, it's important to understand that an employee who earns $25 an hour costs your business more than $25 an hour.
There's More Than Just the Paycheck
When you hire an employee, your business generally becomes responsible for costs beyond their wages, including:
Employer Social Security and Medicare taxes
Federal and state unemployment taxes
Workers' compensation insurance
Payroll processing and compliance
Potential benefits, paid time off and other employee costs
Those expenses can add up quickly.
What Does a $25-an-Hour Employee Really Cost?
At 40 hours per week, a $25-an-hour employee earns about $52,000 per year before overtime.
But $52,000 isn't your total cost.
Your business also pays its share of payroll taxes, unemployment, workers' compensation and potentially benefits or paid time off.
That's why it's important to budget for the total cost of the employee, not simply their hourly wage.
Already Running Payroll for Your S-Corp?
If you're an S-Corporation owner already paying yourself through payroll, adding your first employee may be easier than you think.
You've likely already established your federal and state payroll accounts, you're making payroll tax deposits, and payroll returns are already being filed.
That means much of the payroll infrastructure is already in place.
You'll still have additional costs and responsibilities when hiring an employee, but you aren't necessarily starting from scratch. For a growing S-Corp, adding an employee to an existing payroll system can be much less cumbersome than setting up payroll for the first time.
Can I Just Pay Them as a 1099 Contractor?
This is where business owners need to be careful.
Calling someone an independent contractor doesn't automatically make them one. Worker classification depends on the actual working relationship—including the level of control and independence involved.
If someone should be treated as an employee, paying them on a 1099 simply to avoid payroll taxes can create expensive problems later.
Payroll Comes With Responsibilities
Once you hire an employee, you're also responsible for properly withholding taxes, making employer tax payments, filing payroll tax returns and issuing a W-2 after year-end.
It's much easier to get payroll right from the beginning than to clean it up later.
Plan Before You Hire
Hiring your first employee is an exciting milestone. It usually means your business is growing and you need additional help to keep moving forward.
Just make sure the numbers work.
Before deciding what you can afford to pay, calculate what that employee will actually cost your business.
Thinking about making your first hire? Rangeview can help you estimate the true cost, set up payroll correctly and make sure you're prepared before that first paycheck goes out
See if Rangeview Tax & Accounting is a good fit for you! We offer in-person, ZOOM, and telephone chats.
