What Is the Cost of Hiring Employees?

By Indeed Editorial Team

Updated December 13, 2021 | Published March 22, 2021

Updated December 13, 2021

Published March 22, 2021

To stay on budget, every business needs to know the costs of hiring employees. After factoring in all the costs of hiring a new employee, you might reconsider and look for less expensive alternatives. However, if the employee is a fast learner and highly productive, they might be a good investment. In this article, we discuss the costs associated with hiring an employee and provide tips to help you save.

What is the cost of hiring employees?

According to the U.S. Bureau of Labor Statistics (BLS), the salary for a new hire is only 70.1% of their total compensation. In a March 2019 report, the BLS reported that the remaining 29.9%, on average, of an employee's compensation comes from employer-provided benefits, such as:

  • Supplemental pay

  • Insurance

  • Paid leave

  • Savings and retirement plans

Payroll taxes for hiring an employee also add considerable costs, including:

  • Employer Federal Insurance Contributions Act (FICA) portion: This share equals 7.65% of the employee's annual base wage up to $137,700, as of 2020. The employer's percentage includes both the Social Security tax rate (6.2%) and the Medicare tax rate (1.45%).

  • Federal unemployment tax (FUTA): This tax costs $42 per employee with a 6% FUTA tax rate. Most employers get a tax break credit of 5.4%, which results in paying a rate of only 0.6%.

  • State unemployment tax: This amount depends on your claims experience and your state. The more unemployment benefits claims former employees made, the higher your state unemployment tax rate.

Consider your company's hiring process when calculating the total cost of hiring a new employee. This might include expenses for:

  • Hiring an in-house recruiter

  • Job board postings

  • Using an employment agency

  • Running advertisements

  • Paying sign-on bonuses

  • Paying the costs of employee relocation

In addition to these costs, companies invest time and money in training and onboarding new employees. Make good hiring decisions that allow you to retain employees and maximize productivity.

Tips for reducing the cost of hiring employees

Here are some ways you can save on the cost of hiring a new employee:

Make smart recruiting decisions

Your search for a good employee begins with the recruitment process. Some methods, such as hiring a recruiting agency to find candidates, are more expensive than others, such as having an in-house employee create and monitor free or low-cost job postings. Weigh each one's costs with its benefits so you stay within budget while still making good hiring decisions.

To save on recruiting costs and avoid hiring the wrong person, take the time to evaluate potential employees thoroughly. Run a background check to verify a candidate's previous employment and education and reveal any criminal history. Also consider performing a drug test. These types of tests typically cost between $5 and $80 but are worth the small expense for the reassurance you get.

Related: How To Get the Most Out of Job Fairs

Minimize training costs

Even if you hire an in-house employee, they need training for the new position. On average, a business loses 1% to 2.5% of its total revenue by paying the new hire's salary and the person training them until the new employee reaches their full potential, which can take eight to 26 weeks. Your return on investment (ROI) decreases because of lost productivity. While other employees can help maintain production during this time, their productivity in their own positions might decrease, as well.

To lower the costs of training a new employee, try to hire someone who has experience in or knowledge of that role. The more familiar the new employee is with their job, the easier they can learn their responsibilities and the shorter the transition period. Also develop an effective learning process that includes hands-on training, which is one of the fastest ways to learn.

Related: The Cost of Training New Employees

Set efficient onboarding practices

Onboarding costs can include:

  • Initial paperwork

  • Setting the new employee up with equipment and company software, a cell phone, a company email address, a desk and workspace

  • Orientation

Also consider the salaries of the employees who help with onboarding tasks such as filing paperwork, adding the new employee to the system, helping familiarize the new hire with company cultures, rules and safety regulations and other important information about the organization. Total onboarding costs average about $400 per employee.

One way to save on onboarding costs is to have a good procedure in place, along with an onboarding manuscript the new employee can refer to when needed. Check on the new employee often to find out how they are progressing in their role.

Related: What To Expect From a Pre-Employment Screening

Offer appropriate salary and benefits

How much you pay a new employee is one of the main considerations when calculating hiring costs. You want to pay the employee enough so they appreciate their job, but you also want to maximize your ROI until the employee reaches full productivity. It might take one to two years before the new hire reaches their full potential or the level of their predecessor.

Reducing a new employee's salary during training helps reduce costs. You can increase their pay as their learning progresses, which helps motivate employees to learn faster and perform better. For example, set goals with timelines and milestones. Increase pay when the employee achieves goals by a certain time until they reach their maximum potential and receive their full earnings. Consider hiring the employee on a 45-day trial period, after which they receive their full benefits and other perks. Providing benefits helps keep employees motivated, improves their loyalty and helps encourage retention.

Related: What Is Direct Hiring?

Be efficient

The time it takes to find someone who is a good fit for a position can add to new hire costs. Time has almost the same value as money, so use it wisely. It is also important to find an employee with good qualifications and skills who can stay with the company long-term.

During your interview with a potential employee, tell them exactly what their role involves and what to expect if hired. This information helps them understand what the job offers and decide if it is a good fit rather than discovering later that the job is not what they were looking for and costing you money by quitting.

Hire from within

Promoting an employee from within your organization can help you save money because it allows you to skip the formal hiring process and lower onboarding and training costs. This employee is already familiar with your company and its policies and workflows. External hires typically earn higher salaries than internal employee promotions. External hires can also take about two more years to reach the level an internal hire can. Promoting existing employees also shows your staff the company has room for growth and that they get the first choice for new job openings.

Related: The Real Turnover Cost of Losing an Employee (And Ways to Retain More Talent

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