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The Cost Of Hiring Your First Employee In The United States

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Beginning business operations in the United States can be an exciting growth stage in your business. As you begin to identify locations, key projects, and other details as part of this expansion, the questions will always come back to  “who are we going to hire?” or “how do we hire or relocate someone to manage this work?” This little question can quickly lead to a tornado of information that can overwhelm and confuse even the best of us. Unlike other countries that pay for social benefits, the United States does not. With that, different taxes and employee costs vary state by state, and we can help you begin to understand the essential costs and taxes when bringing on your first hire in the United States.

So, what are the costs associated with a new hire? Let’s take a look:

Compensation & Taxes

As we probably are aware, wages are one of the highest costs of hiring. However, in the United States, this is not the only area to calculate when it comes to the compensation of your new hire. Depending on the state your employee will be living, various taxes must be included as part of the cost of hire. 

Let’s break this down and use the example of your new US Project Manager you have hired, Nadia, for this overview.

1. Federal Insurance Contributions Act Tax (FICA)

FICA tax is a payroll contribution from both employees and employers. It aims to finance Medicare (national health insurance) and social security (retirement). The FICA tax has two portions. Medicare is 1.45% and Retirement is 6.2%. The payment of FICA taxes also qualifies the employee for disability and life insurance benefits, as long as they meet the criteria.

 How does this impact you as Nadia’s employer?

As Nadia’s employer, you decided to pay Nadia a salary of $70,000 USD for her role as a Project Manager. With that annual salary, her  FICA taxes are 7.65% of her salary, therefore the FICA tax you would have to pay would be a total of $5,355.

2. State Unemployment Tax Act (SUTA)

SUTA refers to taxes placed in a state’s unemployment fund to pay benefits to employees who no longer work for their employers. It’s a big offense to neglect paying unemployment tax, and the consequences are fines, penalty fees, and even criminal charges to the employer in extreme cases. The tax rate differs in each state, coupled with how long the employer has been in the labor market.

How does this impact you as Nadia’s employer?

Nadia lives in a state where the state unemployment tax is 2.7%. With FICA, you are taxed on the first $9,500 of wages you pay to Nadia as an employee. That means, to have Nadia as an employee, you will need to pay $257 (2.7% x 9,500) to the government as part of her expenses.

Federal Unemployment tax (FUTA)

FUTA is a payroll tax of 6% employers must pay on employee wages for the first $7,000 in taxable wages. This tax falls solely on the employer as employees are not required to pay. Payments are due quarterly, and there’s eligibility for up to 5.4% in tax credits if the state unemployment tax is paid in full and on time.

How does this impact you as Nadia’s employer?

The standard FUTA rate is 6% on the first $7,000 of taxable wages per employee. What this means is that the maximum you would have to pay for Nadia would be $420 ($7,000 * 6%). Once Nadia makes $7,000 in gross wages for the year, your payment obligation is complete.

Workers’ Compensation

When an employee suffers a work-related injury or illness, they’re entitled to workers’ compensation benefits. Workers’ compensation is generally tax-free at both the state and federal levels. However, if Social Security Disability Insurance benefits (SSDI) come in, workers’ compensation might be taxed when some benefits have been evened out and balanced. In most states, if an employee receives benefits through workers’ compensation and Social Security Disability Insurance and it amounts to over 80% of average earnings before disability, SSDI benefits will be offset. This offset could be subject to taxes if earnings for the year are high enough.

How does this impact you as Nadia’s employer?

Workers’ compensation costs vary by the role that the employee is occupying as well as the state they work in. For example, Nadia is a Project Manager that works in Michigan. For her role as a Project Manager, the average cost of workers compensation is $0.11 per $100 of wages. Therefore, Nadia’s workers’ compensation total would be $77 annually (70,000 *0.11) /100).

Benefits & Insurance

If you offer health insurance to your employees, it sure won’t come for free as this comes under benefits. Even if you don’t provide benefits depending on the kind of worker hired and the agreement shared, you might still run into insurance costs. Here’s a breakdown of what you’ll need to cover on average as part of your benefits package to cover Nadia as a single-member individual.

  • Medical insurance  – $9,000 / year
  • Dental coverage – $289 / year, this is with a 20% contribution from the employee
  • Vision – $60 / year, this is with a 20% contribution from the employee
  • Life Insurance (optional) – $101 ($.12/$1,000 of Salary (1x Salary Benefit Design Assumed))
  • Short-term disability (optional)  – This can be an additional coverage Nadia would like to have and therefore would pay for it out of pocket
  • Long-term disability insurance (optional) – $210 ($0.30 per $100 up to $10,000 month benefit)
  • Optional 401k matching contribution (optional)  – Should consider as additional employees are hired in the US.

Service fees

Here, we’re talking about the cost of working with a professional employer organization (PEO). A PEO works as an external human resources solution for mainly small and midsized businesses to support their back-office operations. Depending on the services they provide as well as your size, the costs can vary, but it is a cost-effective alternative to in-house human resources support. For PEO services on average, you could be paying $400/ month. 

When expanding your business into the United States, the costs of hiring can rack up quickly. Whether as a big organization or a small start-up, you need to ensure you’re hiring at the right time and the right way. Questions such as budget, systems for the onboarding process, and the cost of hiring are questions that should be a part of the planning and strategy stage of your expansion. To help you with this, it is key you have the right human resources partners to help you prepare and make this as easy and seamless as possible.