Why a $14/hour employee costs $20

Workers at Jim Garland's aviation-services firm need FBI background checks, uniforms, health and unemployment insurance and other hidden costs that push the price tag of a $14/hour worker much higher.By Catherine Clifford, staff reporterMarch 26, 2010: 12:35 PM ET

NEW YORK (CNNMoney.com) -- You probably cost your boss a lot more than you think you do.

For Jim Garland, who owns a corporate aircraft cleaning and support services company, a $14 per hour worker has a true cost of $19.63 per hour, or about 40% more than base pay. This so-called "loaded rate" includes fixed expenses -- federal and state taxes, health insurance, workman's compensation, uniforms, and paid time off -- along with soft costs like the time spent training a new hire.

FacebookDiggTwitterBuzz Up!EmailPrintComment on this story
Sam Meisler wants to bring on additional assistants for his veterinary business, but timing the hires so they pay off financially is tricky.

Washington's lawmakers are throwing a lot of ammo at reducing the jobless rate, including a new tax break for hiring the unemployed. But no matter what incentives the government offers, it's hard to convince business owners to hire until they're absolutely certain they need to. Employees are often the most expensive investment a business makes.

"Our entire existence revolves around two numbers: revenue and payroll," Garland said of Sharp Details, in Dulles, Va., which he launched out of his car trunk in 1991. Payroll for 60 workers accounts for around 70% of his firm's operating costs.

Garland outsources his entire human resource department. Joe Sherrier, director of human resources for Employment Enterprises -- the company that manages Garland's HR -- said that as a general rule, business owners should to expect an employee to cost an additional 25% to 30% on top of base salary each year.

Breaking down the numbers: Hilda Kernc has been running a Lebanese food production company out of her home kitchen near Chicago for a bit more than a year. Her vegetarian cooking is so popular that she works as many as 20 hours a day keeping up with demand for her hummus and other Middle Eastern fare.

Kernc is applying for a Illinois state business license and is about to start renting out a commercial kitchen part-time. Previously distributed under the name Hilda's Homemade Appetizers, Kernc's snacks will now be branded "Deleez Appetizers," a combination of the word "delicious" and the Arabic word that means the same.

Kernc thinks it might be time to bring on her first employee. "My husband is helping me, and we were thinking we need to hire somebody," she said. "It will kill me if I am going to work like this."

To prepare, Kernc began researching the costs.

State income taxes vary significantly, but federal taxes are standard: Social Security tax is 12.4% on the first $106,800 of earnings, and Medicare taxes run another 2.9% of all wages. The employer and employee each pay half. (The self-employed pay the full cost of both taxes themselves.)

Employers also have to pay a federal unemployment insurance tax of 6.2% on the first $7,000 of each employee's wages. Illinois adds on a state unemployment tax that's currently 3.9% for new companies on the first $12,520 of wages. (Existing companies have their rates adjusted up or down depending on how many former workers file unemployment claims.) Part of the state unemployment tax is deductible from the federal, but that still leaves employers on the hook for a tax bite.

"I can't afford it," Kernc concluded. "When I saw the price to hire somebody, at this point I can't do it."

But Kernc she also knows she can't put it off indefinitely if demand stays high. "I can't work 24 hours per day," she said.

Hidden costs: The little perks that employees come to expect, from free coffee to daycare services to group life insurance, factor into the price tag of a new worker.

"All of a sudden, by hiring a new employee, adding up all the fringe benefits, it can be costly," said Tom Ochsenschlager, a senior manager at the American Institute of Certified Public Accountants.

Sam Meisler owns two animal hospitals and a vaccination clinic in Knoxville and Alcoa, Tenn. He'd like to hire another one or two full-time assistants to work in his My Pet's Animal Hospital clinics. His company's business is growing, but still, timing the staff expansion is tricky: "What we have to try to do is anticipate the recovery," he said. "It is difficult to know when to hire."

A new hire can actually decrease sales in the short term as they learn the job. As new assistants train on their computer system, Meisler expects occasional missed charges.

"You may even lose a client or two just from miscommunication, because of the veterinarian assistant not knowing how to talk to them on the phone," he said. But on the flip side, extra administrative help gives the veterinarian more time to talk to each client and potentially sell additional services, such as grooming and dental cleaning.

0:00/2:24Treat employees like family

A bad hiring decision can be a big hit to a company's bottom line.

"The cost of hiring the wrong person becomes incrementally more expensive the shorter period of time they have been with you. The first 90 days are typically the most expensive to have them on board," said Sherrier of Employment Enterprises. "If they stay, that is cost you can recover."

The cost of losing an employee and hiring a replacement throws complicates the "loaded rate" calculation of what a worker costs each specific business.

Garland's employees work on high-profile corporate jets, and each of his new hires has to go through a full FBI background check and drug screening. Swapping an experienced worker for a brand-new replacement that needs training sets back the team's productivity.

Washington's policy plans: Job creation "must be our No. 1 focus in 2010," President Obama said in January in his State of the Union speech.

Since then, he's let loose with a fusillade of proposals, including a $5,000 tax credit for business owners for each new hire. That didn't fly on Capitol Hill: Congress pushed back hard against so much spending in the face of a record deficit and growing national debt.

The $17.6 billion jobs bill Obama signed into law last week included a one-year Social Security payroll tax holiday on new hires that were previously unemployed -- but it's a shadow of the more aggressive hiring initiatives Obama had pushed for.

Meisler can hire an entry-level assistant for $8 to $10 an hour. At an annual base salary of around $20,000 -- plus $2,018 for Social Security, Medicare and Tennessee's typical state and federal unemployment taxes -- every extra dollar of government hiring incentive puts a new worker closer to the tipping point of paying off financially.

The $5,000 tax credit Obama talked about would have prompted him to add staff. "I am not sure whether payroll tax credit alone would do it," Meisler said. "I will probably just act like I usually do -- when we need someone, we will hire them -- but there is no real incentive at this point." 

To write a note to the editor about this article, click here. PrintEmail Tax breaks for hiring the unemployed

The nightmare employee

The art of the hire#cnnfb_connect {background-color:#f5f5f5;width:auto;height:auto;padding:10px;clear:both;}First Published: March 26, 2010: 9:52 AM ETRight NowHealth reform impact: Your benefitsStocks up for the weekThousands to lose jobless benefits April 5
Hot List What the hell happened in Florida?Sunshine State dominates the list of troubled metro areas for federally insured mortgages, thanks in part to the condo meltdown. More Workers are the most expensive investment a business like Sam Meisler's vet office makes -- and they come with hidden costs. More Californians to vote on legal weed Golden State voters will face a marijuana legalization referendum in November that experts say could raise $1.4 billion in tax revenue.  MoreQuestions & Answers Latest Small Business QuestionAsk a Question Ask your question...View our privacy policy
GuidelinesFortune Small Business will select a number of questions to answer each week. Submissions may appear online or in our print magazine. Please include a valid e-mail address and daytime telephone number. If your question is selected for publication, we will include and publish your full name, business name, title and location. If you have further questions about our 'Ask & Answer' process, please contact us at fsb_mail@timeinc.com.
CNNMoney.com Comment PolicyYour IndustryAgricultureConstructionConsulting & servicesDistributionE-commerceEducation & child careFashion & apparelFinancial servicesGovernment & militaryHealth care & fitnessManufacturingMarketing & advertisingMusic & artsNonprofitReal estateRestaurants & food servicesRetailTechnologyTransportation & deliveryTravel & hospitality

StateALAKAZARCACOCTDEDCFLGAHIIDILINIAKSKYLAMEMDMAMIMNMSMOMTNENVNHNJNMNYNCNDOHOKORPARISCSDTNTXUTVTVAWAWVWIWYINTL
View our privacy policy
CNNMoney.com Comment Policy How to profit when buyers are brokeHow does a florist sell more in this economy? We changed our business to designing weddings and events only, as the everyday flowers are not selling. We had to throw out too much product at the end of the week -- flowers are perishable! More- The Flower Lady, Suwanee, Ga. Topics: Customer service, Industry: Retail, Sales & marketing Loan CenterMortgagesHome Equity LoanAutosCDs & Money
MarketOvernight avgs 30 yr fixed mtg5.11% 15 yr fixed mtg4.37% 30 yr fixed jumbo mtg5.85% 5/1 ARM3.99% 5/1 jumbo ARM4.51%

Find personalized rates:
 

Rates provided by
Bankrate.com. -->
Original Shows The BuzzSpring gas prices pump upReaders of 'The Buzz' say $3 gallon gas is too high and will hurt the economy significantly. Play Small Biz TipsLending site helps launch boutiqueAfter being denied by three banks, the owner of Boutique Larrieux turned to prosper.com to get startup funds. Play Corner OfficeHow Starbucks found its way backChairman and CEO Howard Schultz says his focus on people, both employees and customers, spurred the company's comeback. Play All CNNMoney.com Original Shows Ask the Expert Best Advice Bing! Business of Green The Buzz CNNMoney NOW CNNMoney Reports Conscious Capitalism Corner Office C-Suite Disruptors Energy Fix Help Desk Home Work How We Got Started Innovation Nation My Biz Playbook Kids & Money Life at the Top Look AheadMoney Tips My Biz Playbook New Money Rules of Retirement Road Warriors The Score Small & Global Small Biz Tips Street Life Strategy Sessions Small Biz Makeover Tech Talk Tech Transformation TechmateThe Turnaround Sponsors
SectionsCOMPANIESAT&T takes $1 billion health care reform chargeCompany plans to take a hit from smaller Medicare-related tax deductions. More

Chrysler to revive 50 dead dealershipsBig firms feast on Treasury turmoilECONOMYThousands to lose jobless benefits April 5Gridlock postpones 7th temporary extension of filing deadlines. Democrats hope to pass a retroactive extension after the two-week congressional break. More

Health reform's immediate impact: Your benefitsHealth care reform: VAT or Sinkhole?TECHNOLOGYBaiting the cyber-scammersScambaiters are on a mission: Reply to fraudulent e-mails, harass scammers and distract them from victims. More

Intel's R&D tax pushRadioShack surges on merger speculationSMALL BUSINESSWorkers are often the most expensive investment a small business makes -- and they come with hidden costs. More

Chrysler to revive 50 dead dealershipsWhere to get startup cash nowPERSONAL FINANCESpeed up your sluggish computerA few easy -- and free -- tweaks can help rev up your old machine, so you won't have to rush to buy a new one. More

Baiting the cyber-scammersRetirement health costs: $250,000 Please create a screen name to access this feature. Screen name (Select one with 3-12 characters; Numbers and letters only)

Forgot passwordEnter your e-mail address below and we will send you an e-mail with a link and code to reset your password.

E-mail

Already have the reset code?

Password selection

E-mail

Reset code

New password

Log in & let's get started!E-mail

Password

Forgot password?

Remember me for two weeks

Not a member yet?

Sign up now for a free accountSign up or log inScreen name

Select one with 3-12 characters;
Numbers and letters onlyE-mail

Make sure you typed it correctly.
You will receive an e-mail to validate your accountPassword

Make it 6-10 characters, no spacesType what you see in the grey box

If you can't read this, try another one.
Yes, I would like to receive occasional CNNMoney member updates about new features and special offers.

CNNMoney will use the information you submit in a manner consistent with our Privacy Policy. By clicking on "sign up" you agree with CNNMoney's Terms of Service and Privacy Policy and consent to the collection, storage and use of this information in the U.S. subject to U.S. laws and regulations. (learn more)

For our international users, please be aware that the information you submit when registering for our services is collected in the United States of America. In addition to being subject to our Privacy Policy, the collection, storage, and use of your data will be subject to U.S. laws and regulations, which may be different from the laws and regulations of your home country. By registering for this service, you are consenting to this collection, storage, and use.

We're Sorry!

This service is temporarily unavailable. Please try again soon.

 

 

Thanks!

Please check your e-mail and click the link to confirm your membership. Then, you'll be ready to participate in all activities and conversations on our site.

Go to your Profile page

© 2010 Cable News Network. A Time Warner Company. All Rights Reserved.Terms under which this service is provided to you. Privacy Policy. Advertising Practices.HomePortfolioCalculatorsContact UsNewslettersPodcastsRSSMobileWidgetsSite MapAdvertise with Us
Magazine Customer ServiceDownload Fortune ListsReprintsCareer OpportunitiesSpecial SectionsConferencesBusiness Leader CouncilLive Quotes automatically refresh, but individual equities are delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET.
* : Time reflects local markets trading time. † - Intraday data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. Disclaimer

View the Original article