Question

Your company plans to hire an employee at a yearly salary of $70,000. Someone in your company says the actual cost will be lower because of payroll deductions. Someone else says it will be higher. Who is right? What is likely to be the total cost to the company? Explain.

Answer 1

The actual cost would be higher for the company. This is because there would be deductions from the salary paid to the employee. Generally speaking, in addition to the base salary, the employer needs to cover other things like employment taxes and benefits (e.g. health insurance, 401(k)). Every employer in the U.S. needs to pay taxes and unemployment insurance for their employees. Companies are required by law to cover social security, medicare as well as state and federal taxes.

Although it would be difficult to compute the total cost to the company, various measures are provided which give us a rough idea of what the estimated total cost to the company would be:

1. The real cost of an employee is generally in the 1.25 to 1.40 times the base salary range.

2. The real cost of an employee ends up “being 18% to 26% more than his/her salary