Understanding the True Cost of An Employee

As a small business owner, you don’t have much margin when it comes to the cost of doing business. The employees you hire are so critical to the success of your business, but how do you decide how much to pay them?

There are many aspects to this decision, but in order to set an hourly (or salaried) rate for an employee you first need to understand the factors that contribute to the overall cost of that employee. Once you understand the true cost of an employee, you’ll be able to use that figure to determine pricing for the services you offer.

Today’s post is brought to you by Marian Ellis, one of our amazing accountants on staff at Joy Accounting. Enjoy!

Why are labor costs important to your business?

One of the decisions that every business owner must make is how much to charge for services.  While there are many factors that impact your rates, the most misunderstood is generally employee labor costs.

While some might think that labor costs are easy to calculate (you pay your employee $20/hour so it must cost you $20/hour) the reality is that the average employee’s true cost can be anywhere from 25-40% higher than their hourly rate.  If you generate estimates for your customers based off an erroneous labor rate, you run the risk of cutting into your profits or, in a worst-case scenario, losing money on customer jobs and projects.

The value of knowing your true labor rate goes beyond client billing.  It is important for business owners and managers to understand the cost of non-billable work (time not spent working directly on customer projects).

It is virtually impossible and likely counter-productive to attempt to eliminate all non-billable time.  Meetings, other administrative tasks, and training are simply a part of doing business.  Knowing the true cost of these activities, however, will help you eliminate the unnecessary tasks and determine alternate value-added tasks to focus on instead. For example, if your employees are engaging in a manual administrative activity every week that adds up to a total true labor cost of $500, you might consider ways of automating that process to reduce costs.  Perhaps an automated solution might cost $300 per week.  If you do not understand your true labor cost, it would be impossible to do an apples-to-apples comparison and make an informed decision.

How to determine your true employee cost

The true employee cost calculation will be different for every business.  There are, however, several elements that you should consider when doing your calculation. Of course, some of these items (i.e. payroll taxes) are fixed, while others (i.e. paid time off) can be set based on your discretion, and your decisions around these discretionary items will cause the true employee cost to fluctuate considerably. The elements to consider are as follows:

  • Payroll Taxes – Federal/State Unemployment, Social Security, Medicare, Workman’s Comp, local payroll taxes, etc.
  • Health Insurance – Employer paid premiums
  • Retirement Benefits – Plan management cost and employer matching contribution on plans such as pensions or 401(k)
  • Paid Time Off – Paid breaks, vacation time, sick leave, paid personal time, paid holidays
  • Overhead – Expenses such as office space, recruiting costs, supplies/tools, administrative costs (recruiting, payroll), uniforms, company paid cell phones, computer equipment, etc.

Knowing how much your employees cost is a requisite of any well-functioning business. As with many accounting and financial concerns, it is highly recommended that you reach out to a professional, such as Joy Accounting Services, for assistance.  Calculating employee costs and streamlining processes to reduce non-billable time are only two of the many skills that we bring to the table to help grow your business.

Managing the Small (but Critical) Pieces of Your Business: The W9/1099 Dance

As a small business owner, there are so many ‘small’ things to keep track of with ‘large’ consequences attached if you drop the ball (or simply aren’t aware of a particular requirement). At Joy Accounting, we have expertise in these requirements so that you can focus on what you are good at – building your business – while we take care of the details that ensure your company hums along smoothly (and without unexpected calls from the IRS!).  Today’s post on the ‘W9/1099 dance’ is from Adrienne Kaylor, Lead Accountant at Joy Accounting. Enjoy!

What You Need to Know for the W9/1099 Dance

As accountants, part of our job is to be sure we track the many moving parts related to running a business. Often, business owners are doing their best to keep up with the important items, and invariably some of the smaller pieces get lost in the shuffle. Collecting W9 forms from vendors definitely falls into this “smaller pieces” category. However, if you are facing a fine for not properly issuing 1099’s to your vendors, it will seem anything but small!

So why are W9’s so important? Because they are necessary to obtain the correct information for you to properly issue a 1099 to certain vendors at year end. The 1099 is also submitted to the IRS, which then uses it to track income for each Tax Payer Identification Number (i.e. SSN for individual/sole proprietor or FEIN for LLC/Corporation/Partnership). If your vendor reports income received from you, but you did not submit a 1099 to the IRS, you could potentially face fines.

As of 2017, the IRS requires 1099’s to be issued for payments equal to or exceeding threshold of $600 during the year. Ideally, you would get the W9 form before issuing your first payment to the vendor, even if it’s less than $600. This is because you may pay that vendor again, later in the year, putting the amount over the $600 threshold.

The most common are independent contractors (such as marketing professionals, accountants, web designers, etc), lawyers, and rent to landlords. Payments that do not require a 1099 include merchandise, utilities, freight, or rent made to a real estate agent. Generally, the IRS does not require you issue a 1099 to a vendor if it is a corporation. Before you issue 1099’s, it’s always best to check directly with the IRS to brush up on the most recent requirements, in case there are recent changes.

If you are a business owner who wants to get these small (but critical) items off of your plate, it may be time to enlist some help from a specialist like Joy Accounting Services!