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Understanding Employee Costs and Their Impact on Employers

As businesses grow, understanding the true cost of employees becomes critical. Whether you’re an employer or an employee, grasping the financial implications of employment is essential. In this article by EasyStaff, we’ll delve into the various aspects of employee costs and their impact on businesses.

Defining Employee Costs

What Are Employee Costs?

Employee costs are more than plain salary or hourly wage. The term refers to the total expenses associated with hiring and maintaining a worker. The MIT lecturer Joseph Hadzima has calculated that the real employer cost for an employee is somewhere between 1.25 to 1.4 times the base salary. The formula takes into account per-employee payroll taxes and employee benefit costs. It also applies to hourly employees.

For example, if your employee’s salary is $ 46,000, then the employee costs are likely to be:
  • $ 46,000×1.25 = $ 57,500
  • $ 46,000×1.4 = $ 64,400

So, the number to keep in mind will be the medium between $ 57,500 and $ 64,400. The formula also applies to hourly employees.

However, the formula doesn’t include other expenses such as recruitment, office furnishing and space, equipment and onboarding. These aspects of employment should be factored in separately.

Components of Employee Costs

#1. Taxes
The types of taxes that the employee is obliged to pay are different from nation to nation, along with the percentage that taxes comprise. However, there are similarities, and the types presented below are more or less common across legislation.

Payroll tax. The umbrella term refers to various taxes that employers and employees pay on wages and salaries. These taxes fund social security and medical care payments to be made to former employees in future. The payer can be either the employer or the employee. It also varies by country.

Social Security tax. This is a percentage of wages that all employees, employers and self-employed must pay. The tax feeds support programs for the retired, disabled and other vulnerable categories of workers. Not all countries have this kind of tax.

Medical care/Insurance. The funds collected through this tax go to medical care for workers. In countries like the US where medical care is not free the money provides medical care for senior and disabled citizens. However, in other countries with free public health care there may not be a tax like this but an employee benefit instead.

Unemployment tax. The funds acquired through this tax are directed to people who have lost their jobs. The tax is paid solely by employers, and employees are not subject to it.

#2. Employee Benefits
There are several distinct types of benefits but they can be roughly compiled into the following groups.

Paid leave (vacation, holiday, sick, and personal leave). Normally, there is a limited amount of days off that a worker can take. They are paid as a percentage of their regular daily wage.

Supplemental pay (overtime and premium, shift differentials, and nonproduction bonuses). Employees get compensated in case of overtime working hours or working over the weekends and holidays. Employers normally offer x2 wage in these cases.

#3. Fringe benefits
Some companies go above and beyond in their perks system. Employees may be offered fringe benefits such as free flights (for flight attendants), free meals (for service workers), or gym memberships (for IT workers). Fringe benefits, along with decent salaries, help keep the workforce.

#4. Overheads
This type of expenses includes spending on equipment for employees and training them. Employee equipment is different across professions. For instance, an office worker needs a desk, a computer and stationary items. The employer may want to add other benefits such as beverages and snacks.

Onboarding an employee means financial and personal effort put into a new hire. According to Forbes, fully introducing a new hire to their job is $ 1,400. Of course, the cost should be translated into an employer’s local reality, but it definitely gives an understanding that there are actual resources put in hiring. On average, it takes up to 6 months before the business can return its investment into its new employee. So creating a smooth and effective onboarding process is crucial for faster return on investment.

In a nutshell, employee costs are somewhat predictable. The formula to calculate the actual amount of money paid as salary is ‘Salary x 1.25 or 1.4'. The formula excludes other spendings associated with hiring. A broader formula will be ‘Total Employee Costs = Salary + Taxes + Benefits + Overhead'. Calculating the true cost of a new employee is crucial in predicting revenue.
Employee Costs are made up of several elements - EasyStaff
Employee Costs

Impact of Employee Costs on Employers

Employee costs have a large impact on business. The influence may not be financial but in the end it determines the bottom line. There are several ways in which employee costs impact the employer.

By nature, employee costs are a financial burden that any business wants to lessen. This is especially true for small and medium businesses where every cent makes a difference. To ease the burden, many companies turn to freelancers or contractors or even remote self-employed individuals who would perform some tasks for them. Another option is to operate in the gray areas with half-declared revenues and spendings. This is a very dangerous step as potential penalties are high.

From the employee’s perspective, employee costs are a reason to stay with the business. Attractive compensation and fair salary are the reasons employees stay and invest themselves into work. Competitiveness of a job position (and the company on the whole) is based on how much workers earn and how well compensated they feel for their labor.

As a result, well-compensated employees tend to be more effective and engaged in their workplace which ultimately leads to overall higher performance and productivity of business. Employees, after all, are the most important capital. Long-term employees become the backbone of the company. They are able to see the progress made, learn from past projects, and make informed decisions based on prior knowledge and experience gained in the company.
Whether to hire an employee or a freelancer is a common question that business owners ask themselves - EasyStaff.
Hire an employee or a freelancer

Advantages

  • One of its most significant advantages is considerable savings on creating a workplace. Even a single employee requires certain investment into their workplace. And these spendings are not one-off, as additional spending is inevitable (from stationary to office rent, etc).
  • You can work with top-notch professionals on favorable terms that match your budget and demand. It is often the case that working with a remote freelancer is cheaper than employing a worker onshore. The business gets the most advantage working short-term with a highly qualified professional who applies their expertise to particular projects.
  • You only pay once the result is ready. The customer does not pay for their freelancer’s working hours, like it is the rule with office workers. Taking into account occasional additional spendings on a project, the overall cost is still incomparably lower than a monthly salary further burdened with taxes.
  • As a customer of a freelancer, companies save considerably on payroll cost. On the whole, since a business and a contractor are equals (unlike business vs. employee), the former is not responsible for the latter. As a consequence, paperwork is not as voluminous or demanding as with regular employees.
  • It is easy to stop a work relationship with a freelancer. Replacing a freelancer is also relatively fast. In contrast, firing an employee and hiring a new one is difficult and time-consuming.

Disadvantages

  • Businesses don’t have a full scale of control over the work process. It is challenging to keep an eye over a person you only know via online messengers or platforms. Video meetings and voice calls may help stay connected, but they may not be enough to properly understand how well and how much work is done.
  • Customers are always at risk of stumbling upon scammers. The most common scheme is receiving an advance payment and disappearing. Signing a contract prior to sending any money to a freelancer and searching for freelancers in proven freelance marketplaces and professional communities helps minimize such risks.
  • There is a potential for data leaks. Unfortunately, even NDAs don’t guarantee 100% data safety for businesses.
  • It is volatile. If you decide to work with a freelancer without a contract, then they may simply leave you half-way and take on new projects. In turn, you will be forced to look for a new contractor and walk him through the whole scope of work once again. The consequence is missed deadlines.
To work with individual contractors risk-free, partner up with EasyStaff.
Partner up with EasyStaff

Legal and Financial Risks behind Working with Freelancers

Individual contractors are individuals, and for businesses it implies worker misclassification risks that may lead to serious consequences. Worker misclassification occurs when the company treats its freelancer as its employee in terms of finance. The major sign is that the individual contractor receives regular payments of the same amount. Government has agencies that control how businesses spend money in salaries. If there is a constant flow towards an individual but no taxes are paid on top of it, the company is given a fine (in the very least). To avoid misclassification and work with individual contractors from any country, businesses turn to freelance management services such as EasyStaff.

EasyStaff acts as a B2B partner for business managed through a single B2B contract. Freelancers are paid by EasyStaff on paper which means that business only pays another business, not an individual. EasyStaff provides closing documents for each party, so businesses can legally declare spending on projects. Thanks to the wide network of banks that EasyStaff works with, companies can send money to any country and any bank card.

Conclusion

  • Understanding employee costs is essential for effective financial planning and business success. Employers should carefully balance costs while ensuring employee satisfaction and productivity. Adequate and competitive worker compensation, made up of salaries, benefits and perks, keeps talented professionals in their teams.
  • An alternative to full-time employees are individual contractors. With them, the tax burden is almost non-existent which is the major reason why more and more SMEs turn to freelance teams.
  • EasyStaff helps make freelancer management safe, secure and fully compliant. Acting as a B2B partner, EasyStaff protects companies from worker misclassification. It is EasyStaff that pays their contractors, not the company itself.
  • Since EasyStaff works globally, companies can hire and pay any contractor, regardless of where they are based.
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