{"id":79,"date":"2011-05-25T04:08:54","date_gmt":"2011-05-25T04:08:54","guid":{"rendered":"https:\/\/chiefcookandbottlewasher.biz\/?p=79"},"modified":"2011-06-02T23:22:55","modified_gmt":"2011-06-03T03:22:55","slug":"hiring-series-calculating-the-cost-of-your-first-employee","status":"publish","type":"post","link":"https:\/\/chiefcookandbottlewasher.biz\/?p=79","title":{"rendered":"Hiring Series: Calculating the Cost of Your First Employee"},"content":{"rendered":"

Hiring your first employee is a big step for a Small Business owner.\u00a0<\/strong>Sometimes it happens right at the beginning; for Bottle Washer and I it was over a year after we had been in business.\u00a0\u00a0The woman we wanted to hire, Kim, was awesome!\u00a0 Kim was\u00a0a perfect match for our fledgling company.\u00a0 She was enthusiastic, a team player, well-versed in her field, and willing to help out wherever needed.\u00a0 She had just finished graduate school, and this was to be her first Real Job.\u00a0 She was relocating from out of state just to work for us.\u00a0 We were terrified.<\/strong><\/p>\n

In a Small Business, everyone has to pull their own weight.\u00a0 There are two categories of employees: those that produce revenue and those that perform support functions.<\/strong>\u00a0 You need both, and frequently in a Small Business a single person is <\/em>both.\u00a0 Revenue producers are your money makers –\u00a0 salesmen, professional staff who log billable time, etc, – those whose actual labor brings money into your business.\u00a0\u00a0A revenue producer should pay for herself, that is, she should bring in enough money to cover the costs associated with employing her, and hopefully a little extra as well (your profit.)\u00a0 Support staff perform functions that are necessary to the business, such a bookkeeping, purchasing and advertising, but do not actually produce income.\u00a0\u00a0The staffing goal of your Small Business should be\u00a0to maximize your revenue producers with as lean a support staff as possible.\u00a0\u00a0<\/strong><\/p>\n

Kim was definitely a revenue producer.\u00a0 The big question was: Could we afford to hire someone?\u00a0 <\/strong>I lost a lot of sleep over this.\u00a0 I felt a huge responsibility to Kim, who was rearranging her whole life to come work for us.\u00a0 What if we screwed up?\u00a0 What if we couldn’t pay her?\u00a0 What would she do?\u00a0 Fortunately, Bob, Our Accountant (see my post A\u00a0Small Business Owner’s Four Best Friends) helped us out by showing us how to run the numbers to see if our Small Business was ready to hire an employee.<\/p>\n

First, consider the costs of employing an individual:<\/strong><\/p>\n

1.\u00a0 Compensation:<\/strong>\u00a0 Will you be paying your employee a salary or an hourly rate?\u00a0 An hourly rate gives you more flexibility to control your payroll costs during lean times by cutting employee’s hours, but a salary gives your employee a higher sense of security.\u00a0 Every job has a\u00a0pay scale for your geographic area.\u00a0 If you aren’t sure what that is, ask\u00a0other Small Business owners, friends, or check the want ads.\u00a0 There are also several web sites that will give salary ranges for a wide variety of\u00a0job titles, but I have found these not to be very realistic for my rural geographic area.\u00a0 (They may be more accurate for larger metropolitan areas.)\u00a0 Decide upon a realistic\u00a0pay range, and calculate the low and high cost per year.<\/strong><\/p>\n

2.\u00a0 Worker’s Compensation Insurance:<\/strong>\u00a0 When you hire an employee, you are required to purchase Worker’s Compensation insurance.\u00a0 The purpose of this insurance is to cover expenses, such as medical payments, \u00a0incurred if your employee is injured on the job.\u00a0\u00a0Speak to your insurance agent (again, see my post\u00a0A Small Business Owner’ s Four Best Friends!) to get a quote on the premium.\u00a0 (The premium is the annual price of the\u00a0coverage.)\u00a0\u00a0 This is usually a fixed base fee plus a variable amount which is\u00a0dependent upon the total\u00a0annual payroll and the risk factor assigned to your specific job descriptions.\u00a0 <\/strong>For instance, a construction company will pay higher Worker’s Compensation premiums than a bookstore, because there is a higher risk of the construction workers being injured on the job.<\/p>\n

3.\u00a0 Unemployment Insurance:<\/strong>\u00a0 Unemployment insurance is actually a tax payable to both your state and the federal government.\u00a0 This money is put into a pool to provide income (unemployment checks) to all workers\u00a0who have lost their jobs.\u00a0 The annual amount is a assigned by both the state and federal governments, and is a percentage of payroll.\u00a0 <\/strong>Your accountant can help you determine what percentage of payroll you will owe in both federal and state unemployment insurance.<\/p>\n

4. Payroll Taxes:<\/strong>\u00a0 Federal payroll taxes include Medicare and Social Security taxes.\u00a0 These taxes are shared by the employee and the employer.\u00a0 Your share will be approximately 10% of payroll.\u00a0<\/strong>These taxes go into the general Medicare and Social Security funds to be used for individuals who are collecting those benefits right now.\u00a0 Your state or municipality may also have payroll taxes.<\/p>\n

5.\u00a0 Additional Benefits:<\/strong>\u00a0 Are there any other benefits that will be a part of your employment package?\u00a0 If you will be offering health insurance, will you pay the premium for the employee only or also their family?\u00a0 If there is a deductible will you cover some of that expense?\u00a0 Will you offer vacation pay? Sick days?\u00a0 Determine what benefits you will offer, and calculate the annual cost.<\/strong><\/p>\n

6.\u00a0 Additional Costs:\u00a0<\/strong>Try to determine any other costs you will incur as a result of hiring an employee.\u00a0 Will you need to purchase uniforms for the employee or pay for training or certification classes?\u00a0 Make a list and add up the costs.<\/strong><\/p>\n

Adding up the costs from items 1-6 above will give you the total annual cost to your Small Business of your new employee.\u00a0 Surprised?\u00a0\u00a0 <\/strong>Notice that several of the items are dependent upon your payroll, so if you offer a lower or higher compensation within your predetermined range, your total costs will go down or up\u00a0by more\u00a0than the difference in compensation.\u00a0 <\/strong><\/p>\n

Second, consider the additional revenue as a result of hiring an employee:<\/strong><\/p>\n

If the employee is a revenue producer, estimate the amount of revenue that individual will produce on an\u00a0annual basis.\u00a0 <\/strong>For instance,\u00a0an attorney billing clients at $80 per hour for 40 hours per week for 52 weeks per year would produce an annual revenue of $166,400.\u00a0 Of course, no employee will be 100% productive, you may have slow periods, and they will probably take vacation, sick says, and holidays\u00a0(whether you pay for those or not), so you will need to adjust your revenue expectations from the this ideal example.\u00a0<\/p>\n

If the employee is not a revenue producer, determine\u00a0if their employment will allow you<\/em> to produce more revenue.\u00a0 Ideally, it should.<\/strong>\u00a0 Maybe this person will take some of the support tasks off your plate and allow you to\u00a0focus more on income maximization.\u00a0 Try to calculate the increased income as a result of this person’s employment.<\/p>\n

Last, do the math.\u00a0 If the cost of employing an individual is higher than the additional revenue brought in as a result of the hire, your Small Business\u00a0probably can’t afford the employee.\u00a0 <\/strong><\/p>\n

We did end up hiring Kim, and she was just as great as we had hoped.\u00a0\u00a0 Have you hired your first employee yet?\u00a0 How did you feel before hiring your first employee?\u00a0 Did you have a better method of determining if your Small Business was ready?<\/p>\n","protected":false},"excerpt":{"rendered":"

Hiring your first employee is a big step for a Small Business owner.\u00a0Sometimes it happens right at the beginning; for Bottle Washer and I it was over a year after we had been in business.\u00a0\u00a0The woman we wanted to hire, … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[26,12,21,9,27,23,13,8,20,11,25,24,22],"class_list":["post-79","post","type-post","status-publish","format-standard","hentry","category-employees","tag-cost-of-employees","tag-employee-benefits","tag-employee-compensation","tag-hiring","tag-hiring-your-first-employee","tag-payroll-taxes","tag-recruiting-staff","tag-small-business","tag-small-business-ownership","tag-staff-retention","tag-support-staff","tag-unemployment-insurance","tag-workers-compensation-insurance"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=\/wp\/v2\/posts\/79","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=79"}],"version-history":[{"count":10,"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=\/wp\/v2\/posts\/79\/revisions"}],"predecessor-version":[{"id":87,"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=\/wp\/v2\/posts\/79\/revisions\/87"}],"wp:attachment":[{"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=79"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=79"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chiefcookandbottlewasher.biz\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=79"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}