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How Do You Calculate The True Cost Of Startup Employee?

Farwah Jafri | November 19 2021

Have you recently invested in a startup and are unsure about the value of your employees? Do you want to know how much to pay your employees?

Many startups suffer from this same uncertainty. You feel that your employees aren’t getting paid enough, or maybe you’re too generous. Either way, to run a booming startup, establishing your employees’ monetary worth is a crucial first step. Continue reading to know more about how a startup salary calculator works.

 

Estimating The Gross Value

To start with, as an employer, you’d have legal base payments for your employees. These include expenses such as pension plans, company insurance, and paid leaves. However, it’s also worth knowing that these outlays are governed by laws specific to a country or region.

As a rule of thumb, data analysts have proposed a startup salary calculator of around 1.2 to 1.4 times your employee’s salary when covering how much they cost (Blenman, n.d.).

However, you should take this information with a grain of salt as it is an extremely rough estimate. If you just want to know much your employees make per hour, you’d have to do some math.

As an example, take an annual gross payroll figure of $80,000. This amount is spread out over 48 weeks, which consists of all working days within a year. If you were looking for a gross weekly income, you then divide $80,000 by 48 to get approximately $1,667 per week. Furthermore, you can divide $1,667 by 40 hours per week to get an hourly rate of about $42 per hour. The calculated amount would then be the gross salary paid to an employee before accounting for pension deductions, taxes, health insurance, and everything else (Berry, n.d.).

Arguably, this would be the simplest way to calculate an employee’s gross income. However, if you want to be more accurate, there are slightly more reliable ways you can do this. For example, Joe Hadzima, a Senior Lecturer at MIT, proposed that, upon consideration of taxes and benefits, an employee’s salary is 1.25 to 1.4 times their base salary. Similarly, Jose Pagliery, a CNN reporter, proposed a startup’s calculated salary is 18% to 26% more than the base salary.

 

Everything You Need To Know

Now that you have a basic idea of a startup’s calculated salary, it’s time to get into the specifics. It’s not just about the startup costs of your employee but the overhead management costs need to be considered. In general, you should be factoring in all of the following before estimating a gross hourly income for your employees:

– Legal fees

– Office equipment

– Advertisement

– Communications

– Repair and maintenance

– Rent

– Investment loans

– Recruitment and training fees

– Software licensing

– Meals and entertainment

– Workers’ compensation, liability, and health insurance

– Printing costs and services

– Hiring expenses (setting up interviews, scouting potential candidates, etc.)

 

Essential Laws To Remember

As stated earlier, every company, by law, is often required to pay for taxes, benefits, and unemployment insurance. These services include covering health care, government taxes, and social security for employees. Usually, they cover most of the additional costs in a startup’s salary calculation.

 

1. Workers’ Compensation Insurance

A workers’ compensation insurance serves to compensate employees in case of workplace injuries. However, this wouldn’t be the same in every workplace. For example, a construction worker would not be under the same physical risk as a white-collar cubical employee.

Consequentially, prices vary immensely depending on the industry and the type of job. In general, each employee gets credited a fixed amount per 100 dollars of their salary. These amounts are estimated by the National Council on Compensation Insurance (NCCI), and there’s roughly calculated compensation for any type of job.

 

2. Federal Insurance Contributions Act (FICA)

FICA is a compulsory deduction from payroll to cover healthcare and social security. Law mandates that employers deduct 6.2% of a worker’s salary for social security and 1.45% for healthcare (IRS, n.d.). Consequentially, these overhead costs should be considered in a startup salary calculator to ensure workers are compensated for additional expenses.

 

3. Unemployment Insurance

An employer in the United States would have to pay for government-mandated unemployment taxes, along with state unemployment taxes. The government-mandated tax comes under the Federal Unemployment Tax Act (FUTA), whereas the state tax is regulated by the State Unemployment Tax Act (SUTA).

These taxes are compulsory for all employed citizens. And, for FUTA, it generally accumulates to a fixed annual amount of $420. This annual amount is calculated as 6% of the first $7,000 made by an employee. However, it’s worth noting that California is the only exception in this instance. Employers in California only pay about 2.1% of the first $7,000 instead of $147 per year.

Meanwhile, state-mandated taxes are much more varied since they are governed according to your respective state. Consequentially, I’d say you could expect SUTA to vary from about 2.7% to 3.4% of the first $7,000 paid to any employee.

With all these details in mind, you can estimate a startup salary calculator, with a base salary of $30,000 being around $3,651. You can check out the official IRS website and NCCI for more accurate estimates.

 

Keeping Your Employees Happy

As brushed upon earlier, paying for taxes set for employers isn’t all you need to cover when running a startup. If you want a productive workflow while ensuring your employees’ happiness, you need to offer them certain benefits. Though this may not seem compulsory, I specifically recommend considering it in your startup salary calculator for a better business model.

Health insurance is yet another important part of the equation. Most employers consider it their ethical responsibility to offer health insurance as part of the compensation package for their employees.

If you’re looking to pay for health insurance for your personnel, our trusted analyst, Joe Hadzima, has estimated an annual cost for that too. He suggests that for an employee that makes $50,000 a year, you should expect expenses of around $2,000 to $3,000. Meanwhile, employees with families could cost approximately $6,000 to $7,000 (Quitana, 2018).

As an alternative, I recommend looking for life insurance or long-term disability insurance instead, which can cost $150 and $250 per year, respectively. It’s comparatively much cheaper for a startup cost calculator and can even be more beneficial for employees.

 

Bringing It All Together

Now that you have everything ready, you may be wondering how you would accumulate all these costs to calculate the true cost of a startup employee.

For starters, a simple startup salary calculator is used to add up all indirect costs involved in the calculation of employee compensation. You would then divide the amount by your number of employees and add that amount according to an employee’s annual compensation.

However, you should understand that this is an exceedingly straightforward way of calculating expenses. Realistically, this method is way too oversimplified. By dividing gross income by the number of employees, we’re assuming every worker costs the same amount. Obviously, within a developing business, this could not possibly be the case. For example, a domestic worker’s time in the office would be valued less than that of a CEO. Thus, it is best to pool costs into the following categories and distribute them accordingly.

 

1. Overhead Management

These could be costs that don’t contribute specifically to a project but are still necessary. For instance, you would include overhead management costs, such as computer software and equipment, rent, printing services, etc.

 

2. Benefits

You would include any additional benefits that you offer your employees. These include retirement contributions, paid leaves, healthcare, workers’ compensation, etc.

 

3. Administrative Costs

Finally, you need to include everything else that is necessary for a functioning business in one category. These expenditures comprise salaries, legal fees, and taxes, corporate expenses, insurance, overtime pay, etc.

With a categorized workflow, your expense management becomes easier and more efficient. Upon dividing costs categorically per employee, you can constructively use your startup’s salary calculator.

 

How Can Monily Help You?

At Monily, we streamline finances across startup businesses using our efficient startup salary calculator that serves to evolve your bookkeeping process, giving you more time to run and grow your business. We prepare taxes, payroll, offer dedicated CFO services, and accountants on-demand to help you with complex business functions anytime. Contact our experts now!

Author Bio

Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.