Working with contractors or freelancers is a great way for many small IT business owners to start out. But as your business grows, it might make sense to bring on an employee or two. Employees offer a lot of advantages for your business, including…
- Consistency. It's nice to have someone onboard who already knows your processes and can help you establish credibility with your customers.
- Loyalty. Not that contractors don’t care about your business, but if they aren’t a full-time employee, their loyalty is really to whoever is offering them the next paycheck because, hey, they need to eat.
- Coffee buddy. ’Nuff said.
Even though employees can be an asset to your IT business, they do come with additional costs, including salary and benefits, insurance, and more. Let's take a look.
Salary & Benefits
When you hire an employee, you need to be able to commit to the cost of meeting a regular payroll, but that’s not all.
“If you hire an IT contractor, the only cost you are responsible for is their hourly rate,” says
David Collins, a
recruiting manager for the
(@Addison_Group) IT contract division in Houston, Texas. “If you hire an employee, you are responsible for insurance, payroll taxes, unemployment if you let them go, 401(k) match, vacation, sick time, training, annual salary, and any bonuses that are associated with the position.”
How much will all that cost you?
“According to the Bureau of Labor Statistics, in March 2016, wages and salaries made up 69.7 percent of total compensation in private employment, while benefits (e.g., paid leave, supplemental pay, insurance, retirement) comprised the remaining 30.3 percent,” says
Gloria Ju, a
freelance writer and editor specializing in employment law and HR issues.
A lot of employment experts we spoke to said adding on 30 percent to an employee’s salary gives a good estimate of the total cost of a new hire.
“If the salary was $100,000, it would really cost you about another $30,000 to offer a full benefits suite for those employees,” says
Henry Yoshida (@henryyoshida),
vice president of product strategy and partnerships at
Student Loan Genius
According to a recent article on CNN, for salaries under $113,700, business owners and employees alike are required to pay the federal government 6.2 percent of employee earnings into Social Security.
On top of that, employers must also pay their share of:
- Federal income tax.
- Medicare tax.
- Federal unemployment insurance.
Read “Understanding Employment Taxes” on the IRS website for a thorough breakdown on federal taxes. You might be required to pay state taxes, too, depending on where your business operates.
As costs start to mount, it can be a bit of a sticker shock for many business owners new to hiring employees.
“It hits you like a ton of bricks when you decide to go from a one-man shop to hiring and expanding your team,” says Yoshida.
If you previously just worked with contractors, they may have had their own contractor liability insurance. Once you move into the realm of employees, you may be the one supplying the coverage.
“Employers are generally required to have Workers’ Compensation Insurance when they begin hiring employees,” says Ju. “The amount of an employer’s Workers’ Compensation Insurance premiums is based on its gross payroll (not the number of employees it employs) and the type of business in which it is engaged.”
Every state has their own rules regarding when an employers is required to have Worker’ Compensation Insurance, except Texas, where it’s optional. Our article “Top 10 Workers’ Comp Insurance Questions” has a lot of useful information if you are looking for a more detailed explanation.
In addition to Workers’ Comp, you might want to consider…
“An employer should consider General Liability Insurance to cover individuals who are neither defined as employees or contractors if they were to be injured on company property,” says
Mike Jacobson (@HRTerminator),
legal editor at
(@XpertHRusa). “This type of coverage extends to vendors, suppliers, customers, and any members of the public at large who have permission to be on the premises.”
In addition to General Liability Insurance, Errors & Omissions Insurance can protect your business from lawsuits arising from alleged professional mistakes made by either you or your employees. Finally, Employment Practices Liability Insurance (EPLI) can protect you, the employer, if your employees sue.
“EPLI coverage is not mandatory, but it protects employers if they are accused of violating an employee’s legal rights,” says Jacobson. “EPLI coverage typically entitles employers to legal representation to defend themselves against lawsuits involving wage and hour disputes, disputes concerning discipline or termination, discrimination and harassment, and hostile work environments.”
Wow, Hiring Employees Is Expensive – Is it Worth It?
Yes! While employees will typically cost you more than contractors, they are also an investment in the future health and longevity of your business.
“The benefit of having a full-time employee is that you have someone on your team that is going to grow with the company, not someone who is there with no benefits who may going from one gig or contract to another,” says Yoshida.
Ready to start hiring? Check out “How to Build a Team of Minions to Do Your Bidding.”
About the Contributors
David Collins is a recruiting manager for the Addison Group’s IT contract division in Houston, Texas. As the recruiting manager, David is responsible for the onboarding and development of a team of junior and mid-career associates, as well as placing IT professionals with companies in search of hard-to-find talent. David takes a consultative approach to IT recruitment and makes it a priority to stay on top of emerging trends in the ever-changing world of information technology in order to provide the highest level of service to clients and candidates.
Michael C. Jacobson is the legal editor for the organizational exit and investigations and litigation sections of XpertHR. Prior to joining XpertHR, Michael worked as an attorney in Manhattan for six years where he defended employers and healthcare providers against wrongful termination, discrimination, medical malpractice, and general liability claims. Michael obtained his JD from the Benjamin N. Cardozo School of Law, where he was the notes and comments editor for the Cardozo Public Law, Policy and Ethics Journal.
Gloria Ju is a contributing author for XPertHR specializing in employment law and HR issues. She worked for 17 years at the Alexander Hamilton Institute, Inc., an employment law information publisher, which included four years as the editor-in-chief. At AHI, she edited the Personnel Legal Alert, Manager's Legal Bulletin, Employment Law Today, and HR Soapbox newsletters.
Henry Yoshida is vice president of product strategy and partnerships at Student Loan Genius, the Austin-based inventor of the first complete student loan employer benefits solution, where he uses his more than 14 years of experience as a certified finance and investment professional to help crush America’s $1.3 trillion student loan problem. A former Merrill Lynch VP and graduate of the University of Texas and Cornell University, Henry has served as advisor and consultant for numerous Fortune 500s and growing companies and enjoys mentoring growing startups.