Author Topic: Employers: What does it cost to hire someone?  (Read 2766 times)

aceyou

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Employers: What does it cost to hire someone?
« on: March 26, 2016, 07:36:34 PM »
Two years ago I created LLC to run a summer long tennis academy.  I did the business by myself and didn't take on employees...it was really simple. 

I've thought about possibly expanding and taking on employees.  Can someone give me a quick walkthrough of how this would work. 

Case Study:Suppose I want to pay a person $10/hour to do 25 hours/week for 10 weeks.  So, $2500, but I know that it's not this simple.
- If this person were paid as an independent contractor, what would my total costs be to pay him/her this amount?
- If this person were paid as an employee, what would my total costs be to pay him/her this amount (payroll and unemployment taxes come into account here, right)?
- Is there extra insurance I'd have to buy to take on employees or any other costs that would be on top of what I've already mentioned? 

 

Felicity

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Re: Employers: What does it cost to hire someone?
« Reply #1 on: March 26, 2016, 09:00:27 PM »
Very interesting question...I know of a tutoring company nearby that pays tutors as independent contractors, and as far as I know, there are no real business costs associated with that. The tutors are just responsible for paying taxes on the % they receive. Basically, to my knowledge, it really is that simple. Though it is possible they're not acting 100% by the book...

You might not be able to class the employees yourself/it would depend on job functions:
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee
But even that link admits there's no clear cut set number of factors to determine the role

Well, that's as useful as I can hope to be! Looking forward to seeing what others come up with. :)

Ynari

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Re: Employers: What does it cost to hire someone?
« Reply #2 on: March 26, 2016, 09:43:05 PM »
I don't have much experience but I want to say: if you're hiring as independent contractors, be sure to raise the rate proportionally. I had a gig (athletic instruction) recently that was misclassified as IC when it should have been employee, and they paid us $9/hour. (I wasn't aware of the misclassification or the absurdly low rate until after I'd started, and quit soon after because of all the sketchiness.)  Now, my costs were low as they supplied all the equipment and supplies, and did most of the admin overhead (one contributor to misclassification). After doing my taxes this year, looks like I would have fared similarly if I'd had a regular job that paid less than $7/hour - i.e. below minimum wage. Plus I managed to get away without purchasing instructor insurance or other necessary purchases (I don't advise this), which would have drive that effective rate even further down.

Rule of thumb for ICs is to pay them 150%-200% what you would pay an hourly employee. Similarly, I'd expect that the actual cost of an hourly employee is around 1.5-2x the hourly wage, depending on how you go about things.

MerryMcQ

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Re: Employers: What does it cost to hire someone?
« Reply #3 on: March 27, 2016, 06:12:45 PM »
Small businesses sometimes call an employee an independent contractor to save money. However, once the IRS and department of labor get their fines going, it costs a lot more than doing it right!!!

If you use an accounting software like QuickBooks, they can do the payroll and tax payments for you. You would have to pay the employer's share of SS & Medicare (aka, FICA @ just under 8% of their pay), probably get workers compensation and unemployment insurance, and pay that (probably pretty cheap but really varies by State), and file some paperwork with the state. If you are hiring for a seasonal job, be sure to look into what happens when the job ends - if the employee is eligible for unemployment insurance, your rate will go up next year!

The paperwork is generally pretty simple and straight forward, and can be found on your state's Dept of labor website. The website likely will also have a guide on hiring your first employee for a small business.

You could go through a temp agency or the like. They handle everything and you just get a weekly invoice. They often charge a 50%+ premium. So, a $10/HR employee may be billed to you at $16/HR.

DebtFreeBy25

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Re: Employers: What does it cost to hire someone?
« Reply #4 on: March 27, 2016, 07:04:10 PM »
First a quick run down of employees vs. independent contractors:

Employees
- Can have a set schedule
- Employer controls how services are performed
- May have limitations on offering services independently or through other employers
- Eligible for unemployment

Independent contractors
- Work for themselves
- Control how they perform services
- May work for multiple clients
- Ineligible for unemployment benefits

If the person you're working with has the freedom to set their own hours and accept or decline individual clients (or any other scenario that provides the autonomy to control their own work), that person is an independent contractor. If you're looking to assign specific hours and require that the person follow your instruction methods, then you are hiring an employee.

The business pays Medicare, Social Security and unemployment taxes and withholds income taxes and the employee's share of Medicare and Social Security taxes for all employees. A client withholds no taxes for independent contractors. For more information about taxes visit: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Understanding-Employment-Taxes

In terms of insurance if you have an existing liability policy, you would add your employee to this policy. There shouldn't be any additional costs aside from training and equipment.

Papa bear

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Employers: What does it cost to hire someone?
« Reply #5 on: March 27, 2016, 07:35:28 PM »
Figure on 15-20% total fringe cost on top of any hourly rate.  (ETA: this fringe would not include any healthcare, paid time off, or retirement spending) I would suggest you go talk with a service such as Paychex to make sure you have everything taken care of.

You will have to have workers comp, unemployment insurance, pay for ss and Medicare, etc.  A service will walk you through all of this.

As for the cost to hire someone, you could spend 0 and get a referral, or you can post paid ads online, anywhere from $50 to $500 depending on the site.  Then you get to sift through resumes, phone interviews, real interviews, i9 and w4, applications, background checks, etc. 

Your first time is a big learning experience.  After that it's not so bad. 

And to the point of IC or W2, most workers should be classified as W2 even if they are paid as an IC.  Look at the IRS guidelines that are posted above. 


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« Last Edit: March 27, 2016, 07:46:56 PM by Papa bear »

aceyou

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Re: Employers: What does it cost to hire someone?
« Reply #6 on: March 27, 2016, 08:00:50 PM »
Thanks everyone for all the thoughtful replies.  If I end up doing this, then I'll be hiring 3-6 people for a 10-week job.  Hopefully that means I wouldn't have to pay unemployment taxes.  It sounds like the cost for hiring employees won't be as bad as I thought it could be. 

There's only a 25% chance I choose to do this, but I need to know 100% of the costs involved so I can make an informed decision. 

Thanks again. 

Axecleaver

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Re: Employers: What does it cost to hire someone?
« Reply #7 on: March 29, 2016, 01:18:49 PM »
For purposes of figuring overhead, figure 18% for W-2 employees, $0 for 1099's, plus fixed costs of whatever benefits you want to offer (none in this case). You could pay the 1099's $12/h to offset this if you felt like it.

Hiring people for ten weeks is a bit more expensive due to state unemployment, disability insurance, and worker's compensation insurance. Each of those three items are charged to you monthly until you hit your yearly maximum for the employee. Here are our costs in NY, for example. Caveat, the Worker's comp piece is really complex, and I won't know my actual costs until after the year is over. I am not sure about getting a pass on the unemployment insurance if it's a defined-duration job.

Tax           Rate         Max
FICA           7.65%   9,065.00
FUTA   0.08%   138.25
SUTA   4.10%   438.70
Wcomp   2.50%   ?
   17.33%   

Fixed costs
Monthly Mandatory Disability insurance
1.78 male employees
4.14 female employees

If you do this, you need to get W-4's from everybody. If you go the IC route, you have to issue 1099's once they earn over $400.