Can You Afford a New Hire?

The decision to hire a new employee is one of the most important decisions a small business owner can make. It can also be one of the most difficult. While every hiring scenario is unique, this framework will help you think through many of the costs involved.

Costs of a New Hire

Recruiting

Once you realize you need a new employee, you have to find him or her. The process can be quick and easy if you already know the right candidate, or long and expensive if you need to conduct a serious search. Factor in any costs in time and money for sorting through resumes, interviewing candidates, and mulling over the best fit.

Salary

Estimate wages and any bonuses you might pay under your compensation scheme.

Benefits

Include healthcare, your employee savings plan(s), life insurance, disability coverage, snacks, office happy hours, and any other perks you provide employees.

Taxes

Include the employer-paid portion of Social Security and Medicare, as well as federal and state unemployment taxes.

Other distributed financial costs

Such as the cost of worker’s compensation insurance, the cost of accounting to deal with the financial ramifications of having a new employee, and other costs that are shared among all employees. If you already have 50 employees, hiring number 51 probably won’t make a big difference. If you’re bringing on your first hire, however, that one employee will be solely responsible for all of these costs.

Equipment and space

Your new employee may need a uniform, a computer, new software, furniture, or any number of specialized tools to do the job. You’ll have to purchase these if you don’t own them already. And don’t forget to add the cost of the office space your new hire will work in, especially if you’ll need to expand to accommodate him or her.

Training

Spend time and money getting your new hire acclimated to the company’s office, culture, and processes. And conduct more specialized training for the specific job as needed. Your costs here are two-fold: the time and money it takes to provide the training, as well as the cost of paying your new hire to learn rather than produce.

Weighing Costs and Benefits

If calculating all of these costs seems overwhelming to you, you can simply do a rough estimate. Investopedia cites entrepreneur Eric Koester, who puts the new hire cost range at 1.5 to 3 times the salary.

Also be mindful of opportunity costs. Spending resources on one new employee means you can’t spend them elsewhere. Consider whether your time and money would be better spent hiring an employee for a different role — or on a different project entirely.

Evaluate the type of tasks you’d like this new hire to tackle. If it’s for a short-term, one-time project, consider working with a temporary employment agency to find the right person to lend a hand for the weeks or months it takes to finish it up. By hiring a temporary worker, you incur the costs of an employee for a limited period of time.

If it’s a longer-term or permanent project or set of tasks that you need help with, consider the benefits a full-time new hire will bring once he or she is fully integrated with your company. Increased productivity. Enhanced morale. Greater revenue. Lower costs if he or she manages logistics.

Regardless of which option you choose, both good and bad employees will cost you about the same. The true worth of a new employee will vary greatly with the type of person you hire — so be sure to hire wisely!