What are the costs of hiring an employee?

Assembling the right team is one of the most important parts of building a small business. You want to invest in hiring and training the right people—and then setting those new employees up for success.

There are certain costs associated with hiring a new employee, and those costs will vary based on a variety of factors, including your location, the type of position you’re hiring for, and whether your new hire is a full-time employee or a contractor. But there’s no arguing that hiring an employee is an investment.

The question is—just how much of an investment is it?

Let’s take a look at how to calculate the cost of hiring an employee—and how to know when that cost is worth the investment:

What are the costs associated with hiring a new employee?

As mentioned, hiring a new employee is an investment. But what, exactly, are you investing in? Or, in other words, what are the costs associated with hiring a new employee?

Recruiting costs. Before you can hire a new employee, you have to find them—and that means spending money on recruiting. If you manage your recruiting internally, then you’ll have to factor in both the time your recruiter will spend on finding the perfect hire for your position as well any additional resources they’ll need to fill the job opening (like job boards or an applicant tracking software). If you outsource your recruiting to a headhunter or recruiting agency, there are additional costs in recruiting fees; typically, a higher hourly rate for your new hire (for temp workers) or a percentage of your employee’s salary (for full-time hires).
HR costs. Once you hire your new employee, someone—typically HR—is going to have to get them setup as either an employee or an independent contractor with your business. This includes processing paperwork, running background checks, facilitating the onboarding process, and coordinating training—all of which take time and budget.
Training costs. Training is a non-negotiable part of the hiring process; if you want your new employee to thrive in their role, you need to give them the training they need to succeed. There are a variety of training costs you need to factor in when training a new employee, including the time other employees will spend training your new hire (and the time that will take away from their primary job role) and any third-party training tools you need to invest in to get your new employee up to speed.
Obviously, when you hire a new employee, you need to pay them. One of the biggest costs of hiring a new employee boils down to compensation, which could include salary, hourly wages, and any additional benefits (like a 401K match or tuition reimbursement).
There are employer costs if you offer health insurance to your employees. But even if you don’t offer employee benefits (for example, if you’re hiring a temporary employee or independent contractor), you still might have insurance costs when you hire a new employee. Depending on the size and location of your business, you may be required to carry worker’s compensation insurance.
Depending on your location and your new hire’s employment status, business owners are also required to pay certain taxes (for example, social security).
Supplies and overhead costs. Setting up your employee’s workstation and getting them the supplies they need to perform their job can impact your bottom line. And if your new employee is working on-site in your office, you may also see your overhead costs (like electricity or stocking your office kitchen) increase.

Clearly, there are a lot of costs to consider when hiring a new employee. But how do those costs translate to actual dollars? While there’s no one-size-fits-all approach to hiring costs (and the actual cost of hiring an employee will depend on a variety of factors), according to a 2016 survey from the Society for Human Resources Management (SHRM), the average cost to hire a new employee is $4,129.

Is it the right time to hire a new employee?

Hiring is an essential part of building your business. But hiring a new employee isn’t cheap—and when you do make the investment, you want to make sure you’re hiring at the right time and in the right way.

Before you move forward with hiring a new employee, it’s important to ask yourself:

Do I have the budget to hire? If you don’t have the money to go through the hiring process (including investing in the proper training for your new team member), it’s not a good time to bring a new employee on board. Work on your budget and get your finances to a place where hiring makes more financial sense for your business.
Do I have the systems in place to support the hiring process? Having the budget for hiring is the first piece of the puzzle—but if you don’t have the systems in place to support the hiring process, you’re going to end up wasting a lot of that budget. Before you move forward with hiring, make sure you have the right systems in place (for example, a thorough job description and an applicant tracking software for your recruiting team) to ensure the process runs smoothly and efficiently.
Will the benefits of hiring this new employee outweigh the costs? Before you invest in hiring a new employee, it’s important to determine that hiring that employee is the right investment for your business. If you’re thinking about bringing a new team member onboard, make sure to do a cost-benefit analysis of hiring a new employee. How much will hiring this new team member cost your business? What benefits are they going to bring to the table, in both the short and long-term—and do those benefits outweigh the costs of hiring them?

Asking yourself these questions before you start the hiring process will help you gain clarity into whether it’s the right time to bring a person onboard—and whether the cost of hiring a new employee is a solid investment for your business.

Tips for bringing down hiring costs

Hiring a new employee can be pricey—but there are definitely ways to bring down the total cost.

Want to cut the costs of hiring a new employee? Here are a few tips to help you save hiring budget (without sacrificing quality):

Ask for employee referrals. Your employees can be a great resource for finding new talent—and can also help you cut down on recruiting costs. Employee referrals can help you save on things like job posting fees—and can also cut down on the time it takes to fill a position. Even if you offer employees a referral bonus for new hires, it can still help you save on recruiting costs over all.
Focus on retention. If you want to cut down on the costs of hiring a new employee, you should focus on retaining the talent you already have. It can cost up to 38 percent of an employee’s annual salary to replace them. By focusing on retention, you can keep top talent at your company—and minimize the costs of replacing that talent and bringing new people in. Make sure you’re investing in your current employees, giving them the resources they need to be successful and continue to grow within your organization.
Systematize your training process. According to a 2017 study from Training Magazine, small businesses spent an average of $1,886 per employee on training each year. And while you never want to cut corners on training, you can cut costs by systematizing the process. Invest the time, energy, and resources necessary to get your training process up and running like a well-oiled machine; the better you systematize the training process (instead of starting from scratch every time you have a new hire), the more you’ll save in the long run.

Another way to bring down hiring costs? Use the right tools. With Hourly, you can onboard new employees in a matter of minutes, which can save you time and money—all for less than what you may be paying with your current payroll provider.

‍This article was contributed by Deanna deBara and originally posted on Hourly.io

You can also attract and keep talented employees by offering employee paid, supplemental insurance to expand your benefit offerings. Contact me how this can work for you.

Author: Paul Carrigan

Licensed agent in Kansas, Missouri and Ohio.

What are the costs of hiring an employee?