Hiring your first employee is an exciting milestone for a small business owner. Having an employee allows your business to increase operations and can free up more of your time so you can focus on growing your business. Hiring an employee is no small step though, and there are certain things you should consider to determine if it’s the right time for you to hire.
It’s important to understand the full cost of a new employee, as well as the technical and legal aspects involved with payroll, onboarding, benefits, disciplinary procedures, and more. Here are some important things to consider before you start the search for a new employee:
The Cost of an Employee
The total cost of an employee is substantially more than just the wages or salary that they’ll be paid. In addition to their direct compensation, you must also factor in the cost of the following:
1. Payroll Taxes
Employers are not only responsible for deducting the correct amount of taxes from their employees’ wages, but they’re also responsible for determining and paying their own share of payroll taxes. These include:
- FICA taxes: Federal Insurance Contributions Act taxes include Social Security and Medicare taxes. They are taxed based on the employee’s gross earnings and are collected every pay period. In 2023, FICA taxes total 15.3% of employee wages, with the employee paying half and the employer paying the other half.
- FUTA taxes: Employers must also pay Federal Unemployment Tax Act taxes, which fund payments provided to eligible unemployed individuals. The tax rate for these taxes is 6.0% and applies to the first $7,000 paid to each employee. Employees themselves are not responsible for FUTA taxes. Most employers pay a state unemployment tax as well (more info below), but businesses that pay a state unemployment tax are generally eligible for a credit of up to 5.4% of FUTA taxable wages.
- State Unemployment Tax: As mentioned above, most states have their own unemployment tax, which employers must pay in addition to the federal unemployment tax. Information about the Massachusetts state unemployment tax rate can be found at mass.gov, and information on the Rhode Island state unemployment tax rate can be found at dlt.ri.gov.
2. Workers Compensation
Both Massachusetts and Rhode Island require employers to have workers compensation insurance once the business has at least one employee. This coverage protects against workplace injuries and illnesses, paying a portion of lost wages and all medical costs if an employee is hurt while working.
The cost of workers comp insurance depends on numerous factors, such as your industry, the average salary you pay your employees, the number of employees you have, where your business is located, and more.
For an accurate cost estimate it’s a good idea to consult with a business insurance agent or HR solutions provider who can prepare a customized quote for your small business.
Additional Insurance Coverage
Depending on your business’s risk exposure and budget, and your personal risk tolerance, you might consider additional employee-related insurance coverage as well. Common options include:
- Employment Practices Liability Insurance (EPLI): Protects against discrimination claims.
- Fidelity and Crime Insurance: Protects against employee dishonesty and theft.
You might also choose to purchase additional insurance coverage based on your industry or other needs. Working with a business insurance agent can help you assess your needs and obtain cost estimates for each option.
Setting Up Payroll
When you have employees, you’ll need to pay wages and payroll taxes regularly, so it’s important to have an efficient process in place for this. You may consider reaching out to your bank to see if they offer payroll processing solutions. BankFive, for example, works with top-rated partners to provide small businesses with payroll and other HR-related solutions. Another option is to process payroll through a bookkeeper. If you already use a bookkeeper for your business finances, you may want to talk with them about adding on payroll services. Alternatively, you can process payroll yourself through bookkeeping software such as QuickBooks or Paychex.
Onboarding an Employee
All employers must have employees complete an Employment Eligibility Verification Form when they are hired, and depending on where your business is located, you may have to fill out additional state forms as well. Information about hiring employees in MA can be found on mass.gov, and information about hiring employees in RI can be found at ri-newhire.com.
You may also consider creating an employee handbook for new employees to reference. There are many online tools and templates to help you put one together, and it should include information about your:
- Business policies
- Work expectations
- Time off and holiday policies
- Disciplinary procedures
- Necessary legal policies
Optional Benefits to Offer
Benefits can make up a substantial portion of an employee’s total compensation. Generally, small businesses with fewer than 50 employees do not have to offer health insurance, but many offer it anyway. Offering benefits to your employees can help with employee recruitment and retention and can benefit overall employee morale. There are many benefits to consider, including:
- Paid time off (PTO)
- Vision and dental insurance
- Life insurance
- Flexible spending accounts (FSA)
- SIMPLE IRAs (a 401(k) alternative)
- Hybrid/Remote working options
There is a lot that goes into hiring an employee, but in most cases it’s a critical step in growing your business. The good news is that you don’t have to go it alone. If you’re a small business owner in Massachusetts or Rhode Island who is preparing to hire employees, BankFive has several solutions that could help. Through our top-rated partners we can offer small businesses payroll solutions, tax compliance solutions, workers compensation insurance, and employee health insurance. Contact us to learn more today.