When a business budgets for a new hire, it usually budgets the salary. Then the first few payrolls arrive, and cash goes out faster than expected. The salary is only the starting point.
Payroll taxes you pay on top
- Social Security: 6.2% of wages, up to the annual wage limit
- Medicare: 1.45% of all wages
- Federal unemployment tax, on the first $7,000 of each employee's wages
- State unemployment tax, at a rate your state assigns, plus other state programs in some states
Insurance and benefits
- Workers' compensation, required for employees in most states, including California
- Health insurance and other benefits you offer
- Retirement plan contributions, if you offer a match
- Paid time off and holidays, which you pay for even though no work is done those days
Getting them productive
- Recruiting costs, including job postings, recruiter fees, and the time you spend interviewing
- A laptop, phone, software licenses, and any other tools
- Training time, and the weeks or months before the new person is fully up to speed
Add it up and the total cost commonly lands well above the base salary, often by a quarter or more depending on benefits and location. Run your own numbers rather than relying on a rule of thumb.
Employee or contractor?
Hiring a contractor avoids many of these costs, but classification isn't a choice you get to make freely. California uses a strict test, and most workers who perform the company's core work under its direction are employees. Misclassifying someone can lead to back taxes, penalties, and wage claims.
Before you make the offer
- Calculate the fully loaded cost for the first year, including one-time setup costs.
- Check your cash forecast. Can you cover it for at least six months, even if revenue dips?
- Define what success looks like. What revenue, capacity, or time should this role create, and by when?
- Set up payroll properly. Register with your state, collect a W-4 and I-9, and confirm your payroll provider handles every filing.
A hire that looks affordable on salary alone can strain cash flow for months. A hire planned on full cost is one you can actually support.
We'd make sure we could cover the role for six months even if revenue dipped before making the offer. Reversing a hire costs far more than waiting one more quarter.