They say that you can’t put a price on good employees, but contrary to this popular adage, you as a small business owner need to make it your responsibility to understand how much you are actually investing in every one of your employees. So, how do you determine this exact cost? The answer goes beyond their basic salary. In episode # 137, Gene Marks and Elizabeth Larkin discuss all the factors you need to consider when calculating the cost of each employee.

Executive Summary

1:53—Today’s Topic: How Do I Determine the Cost of My Employees?

2:23—Apart from your employee’s salary or base compensation, there are additional factors you need to consider when calculating the cost of your employee. These include the taxes you pay in order to employee them at your business, such as unemployment taxes and state taxes.

3:38—Benefits, like health insurance, also need to be taken into account when tabulating the cost of your employee.

4:18—Investing in retirement benefits or 401K’s can save you a lot of money down the line and prevent retired employees from returning to work in the years to come. Other benefits you need to consider include training, vacation and other discretionary benefits.

7:06—Business owners also invest a lot of money in supplies, specialized equipment and uniforms, when hiring an employee. Even the recruiting process can require significant payments.

8:20—Lastly, be sure to add overhead into your calculations. Once you’ve determined all these different amounts, you are ready to total the full amount.

11:04—Gene advises retail business to invest in the technology that will enable them to compete with the convenience of self-service stores like Amazon Go.



Elizabeth: Welcome back to The Small Biz Ahead podcast. I’m Elizabeth Larkin from The Hartford. I’m here with Gene Marks from The Marks Group and he’s a CPA.

Gene: Yes, a CPA, and we’re actually gonna be talking about numbers in this podcast.

Elizabeth: We’re gonna be talking about numbers.

Gene: So, that’s convenient.

Elizabeth: Yes. So, today we’re talking about how to figure out what an employee is actually costing you.

Gene: Yeah. Yeah. It’s a good question.

Elizabeth: Which I’m sure this is something a lot of business owners are like, “You know that guy sitting over in the corner texting all day long?”

Gene: Yeah, or chatting in the break room or whatever, what is this costing me? This is really getting on my nerves. So, yeah, I’ve got some thoughts and I think, Elizabeth, you do too on what employees really do cost you and how to figure out the true cost of an employee.

Elizabeth: We’re gonna get into that right after we hear from our sponsor.

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Question: How much are my employees really costing me?

Elizabeth: Gene, I love today’s question because it’s really putting, we can put some numbers around something that when you just think about it like, “Well, of course, you just look at how much are the salary and benefits costing me,” but, it’s so much more than that when you think about having an employee and employing them, and just the emotional toll of having an employee.

Gene: Yes. Yeah. That’s for sure.

Elizabeth: So, today’s question, and we’ve stripped the name and location off of this at the questioners request. So, she writes, “I run a small café and am planning to open up a second café at another location. Before I do so, how can I figure out what my employees are really costing me?” So, this woman is trying to project ahead and saying, “How much is it really gonna cost me to have new employees at this eventual second location?”

Gene: Right. That’s correct. So, okay. So, let’s go back and forth on this, right?

Elizabeth: Okay.

Gene: ‘Cause you know this too, as well. So go ahead, you throw out, tell me one cost of an employee. Let’s start with the most obvious one.

Elizabeth: Salary.

Gene: Right. So, obviously, there’s salary. Now, it’s either salary or there’s an hourly cost, but it’s your base compensation, is what it is, okay, so that’s fine. So now, it’s my turn. Taxes. Okay?

Elizabeth: Oh, yeah.

Gene: There’s employment related, employer related taxes, for example, you’re responsible for your employer’s share of FICA, which is 6.2% up to the first $90,000 of an employee’s salary. You’ve gotta pay that. Okay? Other taxes, depending on … well, I’ll get to state in a minute … but there’s unemployment tax as well. So, there’s a percentage, and again, it’s like six percent of the first $7,000 in salary.

Elizabeth: ‘Cause you have to pay employment taxes even if the person’s working.

Gene: That’s correct. It’s unemployment, ’cause it goes in the unemployment fund, and then, that gets to pay for people’s unemployment compensation. Then there’s, of course, there’s state taxes as well, that gets figured into this as well.

Elizabeth: And local.

Gene: And local taxes as well. So, in Philadelphia, for example, there were wage taxes that are … most of it is bared by the employee, but there’s sometimes an employer’s share of that as well. So, there’s taxes, you have to say for every paycheck, there’s taxes that are withheld by the employee, so clearly that’s their expense, but then there’s employer’s share of taxes. So, we said base compensation and taxes. Your turn.

Elizabeth: Benefits.

Gene: Yeah, give me one benefit that you have to pay.

Elizabeth: Health insurance.

Gene: Yeah, health insurance is the biggest cost to any employee. The typical employer spends anywhere from two to four thousand dollars a year per employee on health insurance. A lot of employers, again, if you have less than 50 employees, you’re not required by law to provide health insurance, but a lot of employers do. The average employee, cross-country, contributes about 25% of their health insurance cost, they pay for, and the rest is born by the employer. But, it depends on what your plan is and it can cost you another couple thousands bucks a head for that new employee. So, insurance, so, my turn. We’ve got a few benefits, retirement benefits, you might have a 401(k) plan. Right? A lot of employers have that nowadays, it’s very popular-

Elizabeth: Would a café have that?

Gene: A café could and should. I think every business should have it. First of all, you set up a 401(k) plan, it’s defined contribution, so what that means is that your employee could put money away pre-tax and then, you have the option, you don’t have to, but you have the option of matching what they put away or a percentage of it. And, it’s pre-tax and it goes away towards their retirement and we have a retirement crisis going on in this country, I mean, right? People are just not saving enough and what we need is employers need to step up and help their employees save for retirement and it’s not all altruistic either, it’s selfish because if you have a long time employee and they have enough put away for retirement, they’re gonna come back to you and ask for some help. I see that with clients all the time.

Elizabeth: Really?

Gene: Yeah. All the time. I have people that say I’m gonna retire but I can’t afford to. You know what I mean? Or, I had one client, a guy retired, he was in his 60’s and then, six months later came back with this hand out [inaudible], “I can’t afford to be on retirement, I need some help.” And he’d worked for this company for 20 years. Where else is he gonna go? So, it’s really to the advantage of the employer to put money away for an employee’s retirement. So, there’s not only the cost of setting up a plan, which is generally minimal, but then, you need to estimate every year what you think reasonably you would contribute to that plan on behalf of your employees. Can you think of any other benefits?

Elizabeth: Training.

Gene: Perfect. Right. So, every employee needs to get some type of training, and this person is opening up a café, but-

Elizabeth: So, yeah, you’re gonna be opening up that café before you open it up to the public, so you can train your new employees. So, you’re not making money during that time.

Gene: That’s exactly right. So, that’s a cost for that employer and then, who knows, you might also provide a few days of training every year to your employees on, I don’t know, behavior in the workplace or discrimination training.

Elizabeth: OSHA.

Gene: Or OSHA, right, safety and things like that. So, you gotta figure in that cost as well. Another one … vacation is a cost, right? I mean, it’s part of their compensation of an employee, but when the employee’s not there, it’s still a cost to you ’cause they’re not working for you. So, it’s like you’re paying but you’re not getting anything back from it and you have to consider that in as well. Can you think of any other benefits that would cost a small business? I mean, suddenly, you start getting into the voluntary ones that people spend, too.

Elizabeth: Well, we just talked in a couple previous episodes about something like paying for commuter benefits or something like that.

Gene: You might. So, you might provide some discretionary benefits to your employees. We talked about how some employers pay for education or pay for care, dependent care or pay the commute. So, you might have those kinds of benefits that you provide and clearly as a cost for that employee. So, some other stuff. There’s supplies for that specific employee. I mean, depending on-

Elizabeth: Uniforms.

Gene: Uniforms. Right. They get cleaning done.

Elizabeth: Although, I feel like most small businesses make their employees buy the uniform.

Gene: Some do, some don’t. I mean, again, these are all what they need. And then, also equipment as well. Now, this is a café, so I think all the equipment is kind of being used by everybody, but if you are the kind of business that has specialized equipment, that’s something.

Elizabeth: Do you buy laptops for your employees?

Gene: Everybody provides their own laptops.

Elizabeth: Okay.

Gene: Yeah, and I would, I would actually if somebody was really in dire straights, but everybody I’ve hired, they actually take great joy in having their own laptops and they use it for personal-

Elizabeth: They take great joy in it?

Gene: Great joy in having their own lap … I’m not telling them what to buy or giving them something, they get … it’s a tech firm, so they like that. But, my son started at a PWC and they offered benefits for tuition loan reimbursement, they offered to pay for their cell phones, if you can imagine. I’m not saying you’re gonna do that at a small business, that’s quite a great benefit, but I’m just saying these are all the different things you have to figure in. One other thing that I think people sometimes forget about the cost of employees: the cost of recruiting that employee.

Elizabeth: Oh, yeah.

Gene: You know? I mean, right? Whether it’s job ads and the time that was spent and all that, so that needs to be considered. And then, finally, some people like to figure in the cost of overhead for that employee and the biggest piece of that, I think, is just manager’s time. How much time are you spending interacting and supervising and managing that employee? Is it 10% of a manager’s time?

Elizabeth: Yeah.

Gene: Is it 20%? What’s a manager’s compensation? And we need to take that and allocate it to the cost of the employee. So, all of that should add up to what your cost is for your employee.

Elizabeth: So, what would your next step if you were this woman opening this second café? You’re gonna go in and Excel spreadsheet this out?

Gene: Yeah. I would absolutely be Excel spreadsheeting this out and I would be with the intention of minimizing my employees. I mean, when you … it’s pretty harsh when you start adding it all up and saying, “Oh, my God, what these people are costing me.” That should be good motivation for you to say, “You know what? We ought to really be doing … can we be doing less of this? Can we be doing more of it with fewer employees? Is there any automation that needs our … ” A perfect example is, I have one guy that owns three coffee shops and he has people that are with the coffee, but then also, people that are spending just cashing employees out. And, I just was talking to him yesterday-

Elizabeth: Cashing employees … oh, customers.

Gene: I’m sorry, cashing customers out. Excuse me. And, I was saying and you would think that’s quick and it’s quick about the time, but it’s 20% of the time spent in the store to like whatever, and that’s a cost, 20% of it that he could save a fifth of an employee if he cut that out. And, we were just talking about it saying, “Why not just have self-service, would you consider that?” And, I’m not seeing it right now as much in some coffee stores, but when you do think about it, Elizabeth, I mean, if you go into a coffee store and you just get the coffee, it’s delivered, and then you just check yourself out, swipe the card, say, I got a coffee and whatever, like self-service like you do in a CVS or the supermarket nowadays.

Investing in that technology may pay you back from the cost that you’ll save from your employee. You have that many less people in your stores and a lot of small business owners are considering … a lot of them are forced to do it ’cause they can’t even find employees, let alone afford to pay for them and so all that rolls up into the cost.

Elizabeth: Great. Okay, we’ll be right back with Gene’s word of brilliance.


Elizabeth: We’re back with Gene’s word of brilliance.

Gene: Again, I’m cheating a little, but this is just one word. It really is, Elizabeth, it’s called Amazon Go. Now, do you know what Amazon Go is?

Elizabeth: No.

Gene: You don’t?

Elizabeth: No.

Gene: Okay. So, we’ve talked about Amazon before, so I apologize if we’re becoming all Amazon all the time on this podcast, but it’s just because there’s other news coming out from them that affects a lot of small businesses. Amazon Go, Elizabeth, is their chain that they are planning, of cashierless grocery stores. So, they just opened this fall their third one in Chicago, and they are announcing soon that they are planning on three thousand of these grocery stores around the country, mostly in populated areas.

And what these stores are gonna be is that you and I go into the store, we wanna get a pint of milk or maybe a prepared sandwich or something that you would get from a 7-Eleven or something like that, and you go, you pull it off the shelf, you scan the barcode with your phone, you’ve got the Amazon Go app running on your phone, it’s got your payment all set up, you stick it in your bag, it’s all paid for and it’s done.

And then, when the inventory gets below a certain level, there are sensors on all the different shelves or pallets that’s holding onto them, automatically reorders the stuff and then, when the stuff gets delivered to the store, then they have one or two human beings that load the shelves at least until they figure out how to have a robot replace those human beings as well. It’s the future, to me, of convenience and grocery stores. Now, they’re focusing on urban areas because these are all the places where people are willing to pay a little bit more for their products and they want the convenience of it.

But man, I’m telling you Elizabeth, it you’re a grocery store owner, if you’re a convenience store owner, even if you are just running a retail store, I’m telling you, Amazon has disrupted industry after industry and this is gonna be an enormous disruption and you’re gonna have to have your plan for how you’re going to compete with that because people will pay a little bit more. Maybe you wanna beat it on price. Maybe you wanna emphasize that your store has great service and that’s why you wanna shop at our store or maybe you wanna start tucking some money away and investing in some self-service technology so that you can be right up on the same level as an Amazon Go ’cause that’s what’s coming for retail, at least convenience retail, in the future and I’m warning you as small business owner, if you’re in that field, you have to be ready for it.

Elizabeth: I refuse to use self-checkout.

Gene: I use self-checkout all the time.

Elizabeth: Of course you would.

Gene: And you do it why, because you’re supporting the employees, the workers?

Elizabeth: The workers. Yeah.

Gene: So, you would refuse to drive in a car when they came out? You would still ride horses? Is that what you’re telling me?

Elizabeth: Yeah. I would.

Gene: Really? Do you ever fly in a plane or would you prefer to just take a train?

Elizabeth: I just like trains.

Gene: You just like trains. You never fly in a plane.

Elizabeth: Nope.

Gene: When you went to Bali, you canoed to Bali, is that right?

Elizabeth: Right.

Gene: You can’t refuse to use technology that improves your life. And, yes-

Elizabeth: I don’t really think self-checkout improves my life because the few times I’ve done it, I’m always behind the person that can’t figure it out, someone from the store has to come over, so it’s-

Gene: Dude, it improves my life. I’m in and out of stores so much faster with self-checkout. I’m in more control of the transaction. I love self-checkout.

Elizabeth: Well, you’re also really heartless and don’t care about employees.

Gene: It’s not a heartless I don’t care about employees, it’s just that this is great technology that makes my life better, that’s what all technology’s designed to do and it’s disrupting industries and employees will figure out other places to work. I mean, there were a lot of people that were in the horse industry, blacksmiths and whatnot, they figured out other stuff to do, yeah.

Elizabeth: Yep.

Gene: People that were in the train, I mean, trains used to be the main way of transportation around this country. They’ve been displaced.

Elizabeth: I do love trains. I love traveling by train.

Gene: Trains, yeah, trains are great even a nice horse ride is very nice a little, but let’s be-

Elizabeth: When was the last time you were on a horse, Gene?

Gene: Oh, it was in Summer Camp when I was 14 and I got stung by a bee. That was my last time I ever rode on a horse.

Elizabeth: Thanks for joining us everyone, we’ll be back in a couple of days with our next episode.

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