How much does an employee cost – really?

What do you think it costs to employee someone directly?? ??

If you haven’t taken the time to do the actual math, you might be surprised.

We know the numbers well because there is always that point in our relationship with a new client who is using us for temporary staff when they inquire about the difference between our hourly bill rate 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’m paying for an employee I hire directly?? ?

We love this question because it brings up such an important topic. Most people, even people who make a living by being in the people business, just don’t realize how much it actually costs to be an employer in today’s world, in 2024, in the state of Washington.? While what PACE or any staffing agency bills you per hour? for a temporary employee is very visible, you see it in dollars and cents on your invoice, the dollars and cents an employer actually pays to employ someone directly is often hidden in financial reports,? not well known to the people who are making decisions about how to get work done.? Should I hire someone directly, or should I consider just putting a temporary employee in their place until I know for sure that my business needs to add to staff. Should I make a long term commitment to an employee, 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 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 the employer of record. We felt they needed to know more in order to make good decisions about how best to staff their organizations given the many ways in which employers can elect to get work done. This blog is an updated version of the blogs that have attempted to outline those costs at different points in time.? 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.

Here’s how we break down the costs all Washington state employers will incur when they decide to be an employer….

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.? The employee’s pay rate, prorated back into the rate per hour 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 in order to compete against employers seeking the same skills and experience.

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.

And what some employers fail to take into consideration is that these increases in mandated rates per hour trickle down into across the board pay increases for all employees, not just the entry level beginners.? If an employer in Tukwila asks us to find them an employee and believes that they can just pay them $20.50 an hour, the prospective employee only hears they are being paid minimum wage for their 3-4 years experience.? Not exactly an attractive job opportunity.

Payroll Taxes – the add on costs owed to state and federal taxing agencies for every dollar earned, every hour worked.? ??

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 in the state of Washington pay these taxes at rates dictated by the regulatory agencies, in some cases depending on the employers? previous use of the benefit being funded thru the 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.

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• 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 previous experience rating, but generally runs between 2-6% of the employee’s wages up to $68,500 in 2024.? Each year the base pay rate that is subject to SUTA tax increases. In 2014, that base pay rate subject to SUTA tax was $41,300,? ? Washington state SUTA taxes are amongst the highest in the nation.

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• 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.

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• 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 that job category.? 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.? The average WC obligation increased by 4.9% in 2024, with the average rate $1.42/hr.

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 adding new benefit obligations for all Washington state employers 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.? Doing the math this adds approximately 2.5% of the employee’s pay rate to their total cost package.
• 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.

We calculate that the costs of providing and administering all these mandated social welfare benefits adds over 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 the healthcare plan you are offering.

Compliance Costs

The costs associated with a typical compliance package (including a? background check and drug screen) can range between $35 to $300 per employee. If vaccinations and immunizations are required, as in most healthcare environments involving patient contact, costs can be even? higher. If you’re a company requiring comprehensive educational or reference checking there are additional costs attached to these requirements.

If you build these costs into the employee’s pay rate by dividing total compliance costs (incurred at the point of hire) by the number of hours the employee is likely to be employed, a good estimate of the add-on charge for compliance can be anywhere from $.10 to $1/hr depending on the upfront required costs and how long the employee stays attached to your company.

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 pay, benefit and compliance policies are in place, your DIRECT COSTS are essentially non negotiable add-ons to your employees pay per hour and are a requirement of all “employers of record” in the state of Washington.

?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 HR and managerial 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

This model suggests that if you want to know what an employee really costs an employer in the state of Washington in 2024 you take their base wage and multiply it by 1.48%. We know that number well because we feel obligated to walk our clients thru this same type of analysis when it comes time for them to decide whether to staff an open role with a temporary employee or an employee they would hire direct. Their answer isn’t always just based on the numbers as other factors come into consideration as well.? Is there a difference in the quality of employee you can attract to work in a long term but uncertain temporary role compared to the type of employee you can attract to work in a role considered more “permanent.”?How does the employer feel about the possibility of having to lay off a newly hired employee if business doesn’t turn out as expected.

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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 or email our Partner Service and Solutions Team [email protected] , and we’ll be in touch!