How much does an employee cost – really?

What do you know about what it costs to be an employer?  

There is always that point in our relationship with a client who uses us regularly for temporary staff where they comment about the difference between our hourly bill rate for one of our “temps” compared to what they believe they are paying for one of their own employees. Why does my “‘temp” cost so much more than what I pay for an employee I hire directly?   

We love this question because it brings up such an important topic. People just don’t realize how much it actually costs to be an employer in today’s world. While what we bill you per hour  is very visible on our invoice, the costs an employer actually pays to employ someone directly is often information not available to people who are making decisions about how to do staffing. Should I hire an employee directly and take on all the costs of being an employer, or should I just bring on a temporary employee without any of those long term commitments? Which model makes the most sense? It’s hard to tell until you know the facts about what it costs you to be an employer.

This blog is written to outline those costs. We actually started blogging on this topic in 2014 when we uncovered that a lot of hiring managers simply didn’t have a good understanding what it was costing them to be an employer of record. We felt they needed to know more in order to make good decisions about how best to get work done. This blog is an updated version of blogs that outlined those costs. In 2024, the costs of being an employer are a lot higher than what they were in 2014 – a whole decade of mandatory benefits and regulatory costs later.

The Employee’s Pay Rate

By far the biggest component of what it costs to be an employer is what you agree to pay your employee  – typically a rate per hour, per week, or on an annual basis, prorated back into the rate per hour which is generally the pay model recognized by most payroll systems.

As we all know pay rates were intended to be determined by the marketplace – what other employers competing for the same employees are offering to pay similarly skilled employees. As a general rule, the more skills and work experience you require of a candidate, the more you need to pay them to encourage them to accept your job offer.

What has happened since 2014 is that market based pay requirements have been dramatically impacted by changes in Washington State’s mandated minimum pay rate. In 2014, that minimum hourly pay rate was $9.32. In 2024, the minimum hourly pay rate for Washington state is $16.28/hour but for Tukwila it is $20.29; for Seattle it’s $19.97. These are hourly pay rates that are leading the nation – no area in the country pays more.

These increases in mandated rates per hour have trickled down into across the board pay increases for all employees, not just the entry level beginners.

Payroll Taxes – the add on costs you pay to state and federal tax agencies   

There are a variety of taxes that have to be paid to state and federal payroll taxing agencies that have jurisdiction over your relationship with your employee and your payroll processes. All employers pay these same taxes.

  • FICA is the federal tax paid by both employees and employers for Social Security and Medicare benefits. In 2024, the social security tax is 6.2% of wages up to $168,600. The Medicare tax is 1.45% of all wages.

 

  • The SUTA tax includes monies paid into the State of Washington to provide unemployment and social welfare benefits. The rate varies depending on the payors experience rating, but generally runs between 2-6% of the employee’s wages up to $68,500. Washington state SUTA taxes are amongst the highest in the nation.

 

  • The FUTA tax is the federal version of SUTA and is used to fund state workforce agencies. In WA, that tax ends up being 6% of the employee’s first $7000 in earnings, OR $420 per employee per year.

 

  • Workers Compensation Insurance. In Washington, employers are required to contribute to a state wide fund to cover the costs of any injury treatment and/or lost wages caused by a workplace injury or accident. Washington employers contribute to this fund based on the employee’s job category and their experience rating with workplace accidents. For low risk jobs it can be as little as $.10-.15 /hr. For high risk jobs the state insurance tax can be $5-6/hour.

Mandated Local and State Paid Time-Off and Long Term Care Benefits

For all Washington employers, the costs incurred to fund mandated paid time off benefits has been increasing substantially since 2018 when the required paid sick time requirements went into effect with additional benefit obligations kicking in after that date.

  • All employers are now required to provide their employees with 1 hour of paid time off for any health related issue for every 40 hours worked. This totals to 52 hours a year, or just under 6.5 days a year.
  • In 2020, the new Family and Medical leave provisions went into effect that provides employees with 12-16 weeks of paid time off for certain medical issues and/or the arrival of a new child.  These are benefit costs paid by employees, but the employer pays the costs for administering this benefit.
  • Since July 2023, employers have been required to withhold taxes from their employees pay at a rate of .58% or 58 cents for every $100 paid to the employee. Again, this is a tax paid by the employee, but the employer pays the costs of administering this benefit.

The costs of providing these social welfare benefits adds another 3% of the employee’s base pay to their direct costs.  

Mandated Healthcare Benefits   

The Affordable Care Act mandates that all employers provide either comprehensive health insurance for their full time employees or pay penalties. While not all part time or temporary employees are eligible for this benefit, but if the employee is full time and enrolls in your company’s healthcare plan, costs will generally be between $6000 – $7500/year per enrollee, or $2.88 – $3.60/hr. depending on your specific compliance requirements. The costs associated with a typical compliance profile (including a  background check and drug screen) can range between $35 to $100 per employee. If vaccinations and immunizations are required, as in most healthcare environments involving patient contact, costs can be significantly higher. If you require comprehensive educational or reference checking the costs go even higher.

Most staffing agencies will build those costs into their bill-rate by dividing total compliance costs (incurred at the point of placement) by the number of hours the employee will be on assignment.  The typical add-on charge can be anywhere from $.10 to $1/hr depending on the upfront required costs and the length of the assignment.

Enhanced Benefit and Paid Time Off Costs 

Although all of the above costs are mandatory, in reality most employers offer their employees other types of benefits that add additional costs per hour. For example….

  • Most employers offer paid time off in excess of the benefits mandated by the State of Washington. If, for example, you offered 2 weeks of vacation in addition to 6 sick days of sick pay, your costs per hour increase by 3.8% of the employee’s pay rate.
  • If you provide 10 paid holidays your costs increase by another 3.8%.
  • A 401K matching plan or other retirement programs often adds 2-5% of the employee’s pay to their direct costs.

Direct Costs

In our world we consider all of the costs related to pay, mandatory and voluntary benefit etc. DIRECT COSTS because they are directly related to the costs of being an employer. Once your benefit policies are in place, your DIRECT COSTS are essentially not negotiable. When PACE provides any Employer of Record service such as we do when providing you with a temporary employee or becoming your pay agent we pay the same DIRECT COSTS as any Washington State employer.

 Other Employer Related Administrative and Overhead Costs  

To get a realistic sense of what it costs you to be an employer, you have to factor in all the costs of hiring an employee, onboarding them, paying them, and managing their benefit eligibility.  These costs include…

  • Employee Recruiting and Selection Costs – According to the Society of Human Resource Managers, the internal costs required to support the sourcing, recruiting and hiring of an employee is somewhere between $3500 and $10K – and that doesn’t include agency fees. These hiring costs, converted into an hourly rate prorated on an annual basis, can add another $2-5/hr to an employee’s costs per hour – more if you make a hiring mistake and you have to prorate the total costs over a shorter life span.
  • Administrative Costs – include the costs of paying the employee and administering their benefits. We estimate these costs to be about 1% of the employee’s pay rate.
  • Unforeseen Legal Liabilities – are the costs that accompany every employer-employee relationship and are the unforeseen costs that can be incurred if an employee is injured, files a claim for unemployment or worse yet, a claim for discrimination or workplace harassment. A cost of 1.5% of the employee’s base pay is the typical percentage attached to cover these unforeseen liabilities.

Adding Up all These Costs – the Big Picture!    

Here’s how all these costs add up on a per hour basis….  

Cost Item Cost Per Hour
Pay Rate (example) $30.00
FICA and Medicare  Taxes (@ 7.65% ) $2.30
Washington State SUTA  @3% $0.90
FUTA @$420/year prorated $0.20
Workers Compensation Insurance (admin role) @.15/hr $0.15
WA Mandated Sick and Safe Benefits @3% $0.90
Healthcare  @$693/mo $4.00
Additional PTO (Vacation, Personal) @3.8% $1.14
Holiday Pay @3.8% $1.14
Retirement/401K Match @2%  $0.60
Recruiting/Selection (prorated annually) $2.40
Administrative Costs @1% $0.30
Set aside for potential legal liabilities @1.5% $0.45
Total Employer Costs $44.48

We go through a lot of these cost analysis when trying to help a client decide whether or not it is a better business decision to staff an open role with a temporary employee as compared to staffing it with an employee they would hire direct. The benefit of the temporary solution is that the costs per hour are only incurred while the temporary employee is actually at work while the costs of hiring direct means that those per hour costs have to be included whether or not the employee is at work. Also considered is the probability of hiring and then having to cut back which is often the primary reason to staff flexibly.

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PACE Staffing Network is one of the Puget Sound’s premier staffing /recruiting agencies and has been helping Northwest  employers find and hire the “right” employees for over 45 years.

A  5 time winner of the coveted “Best in Staffing” designation , PACE is ranked in the top 2% of staffing agencies nationwide based on annual surveys of customer satisfaction.

PACE services include temporary and contract staffing, temp to hire auditions, direct hire professional recruiting services, Employer of Record (payroll) services, and a large menu of candidate assessment services our clients can purchase a la carte.

To learn more about how partnering with PACE will make a difference to how you find and hire employees, contact us at 425-637-3312, email our Partner Service and Solutions Team partnerservices@pacestaffing.com, or complete the form below and we’ll be in touch!

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