How Much Does It Cost to Bring on a New Employee?

Bringing on a new employee is costly; more so than many people realize.

In fact, it costs on average, $4,000, beyond salary and wages, to hire a new member of staff. This figure comes from the U.C. Berkeley Institute for Research on Labor and Employment, which estimated that it costs approximately $2,000 to replace a low-skill, manual laborer, while managerial and professional employees can cost near $7,000.

But why does it cost so much?

From recruiting and training, to salary and benefits, to taxes and insurance, the costs associated with a new hire can quickly add up. Let’s take a look at some of the biggest expenses that are often involved with the hiring process, and see what you can expect if you decide to bring on a new worker.

Recruitment Costs

First, there are the costs associated with finding a new hire. The recruitment process in and of itself can be costly, and the associated expenses can include advertising, background checks, drug screening, and follow-ups.

Training Expenses

Finding a qualified applicant is only the beginning. There’s also the added cost of training that’s involved when onboarding a new hire. While training costs will vary from company to company, there’s always a learning curve involves, which could result in errors or slower progress while your recruit gets the hang of things. This is true regardless of how skilled or qualified your new employee may be. But while training can be costly, it’s also a vital part of the hiring process, and shouldn’t be overlooked.

Insurance and Taxes

A new employee will also raise the costs of insurance and taxes. Consider the different insurance policies you will need to apply for, such as health insurance for your employee and workman’s compensation which is required in most states. You should also consider the amount you will be paying in taxes; you’ll have to contribute 7.65 percent of the employee’s income, in addition to their wages, as the employer’s share of FICA taxes.

Salary, Benefits, and Insurance

Obviously, you will want to take into consideration the costs involved with paying your employee as well. Determining how much you can afford to pay, and ensuring that it’s a fair amount, while at the same time making sure you’ll still be able to turn a profit is an important part of determining whether you can afford a new hire. Everything from retirement plans to bonuses all cost money, and it’s important to calculate all of these costs in if you’re considering a new employee.

While hiring an employee may not result in profit right out of the gate, in the long run, investing in new employees can pay off. Ideally, a new employee will result in increased production, and in turn, higher profits, but it’s important to keep in mind that it usually takes some time to reach that point.

According to the Studer Group, “A survey of 610 CEOs by Harvard Business School estimates that typical mid-level managers require 6.2 months to reach their break-even point.” You should also consider that losing an employee within the first year can cost your company up to three times the amount of that employee’s salary.

In the end, the decision to hire a new employee can help to increase revenues, but it’s not something that should be taken lightly. A new worker can also mean new expenses, especially if it’s your first employee. Spending some time up front to calculate how much you can expect to spend on the new worker, as well as estimating your potential increased revenue will help to give you a realistic idea of how much it will cost you to bring on a new hire, and will show you when you can expect to start making a profit.

And if you currently have employees, it’s worth investing in employee retention strategies, to help keep the team that you have longer; reducing turnover, and saving your company from the added expenses that are involved with hiring.

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