- May 17, 2013
- Posted by: Orkun Ozkaymak, CPA, MBA
- Category: Blog
You started your own business, and just as you predicted, it is doing well. But at the same time, you are stomped and you need help. After looking at salary sites for how much the market value of the helper would be, you multiply the hourly rate by 40 and come up with your cost per week.
That’s all well, but if that’s all you are considering before hiring help, you are in for a surprise.
To get a better sense of the figures we will be talking about, let’s say your name is Jack, the boss, the job creating workaholic.
And your newly hired assistant is Jill who is tidy, organized and has great people skills.
Jack Hires Jill at $10 / hour. Jill works 40 hours a week, what is the cost of Jill to Jack’s business per year?
First we take the base salary, and multiply it by 2,080 (Hours Worked Per Year).
Salary = $10 x 2080 = $20,800. Not too shabby for an introductory assistantship position.
Then we figure out how much the employer’s portion of Social Security tax Jack’s business has to contribute.
Employer SS = $20,800 x 6.2% = $1,289.60 (6.2% is paid on the first $113,700 per employee per year)
Then we figure out how much the employer’s portion of Medicare tax Jack’s business has to contribute.
Employer MEDI = $20,800 x 1.45% = $301.60 (unlike SS, no cap on Medicare taxes paid)
Then we figure out how much of the state unemployment tax Jack’s business has to contribute for Jill. (Let’s assume minimum contribution in IL)
Employer State Unemployment = $12,900 x 0.55% = $70.95 (2013 Taxable Wage Base Amount = $12,900)
Then we figure out how much of the federal unemployment tax Jack’s business has to contribute for Jill. (using the above IL assumptions)
Employer Federal Unemployment Rate = 6% – 0.55% = 5.45%
Employer Federal Amount = 7,000 * 5.45% = $381.50 (rate applies to first $7,000)
Salary = $20,800.00
SS = 1,289.60
MEDI = 301.60
S UNEMP = 70.95
FUTA = 381.50
TOTAL = $22,843.65
EMPLOYMENT TAXES = $2,043.65
In this scenario, Jack has to contribute an additional 9.82% to the salary he is paying Jill in the form of taxes for the privilege of being able to conduct business and hire employees. Jill’s hourly cost to Jack is $10.98 instead of the original $10 he was expecting.
Worker Compensation Insurance (if you have employees, you are required by law to get it, sort of like auto liability insurance)
Employer Portion of Insurance
Paid Holidays, Vacations, Sick Days
Retirement Contributions and Pension Plans
Post Retirement Health Insurance