Recent I've come to realize that it costs a whole HECK of a lot of money to support a single employee in a business.
I'd be interested in hearing from anyone with any real experience as to just what those costs are...
I've been getting a lot of offers to do contract work, for example, instead of fulltime with benefits, and I'm kinda interested to know what I'd be missing out on if I took a job that paid say, 30% more than I had prior at a salaried position with benefits?
I really have no clue about a lot of these costs.
This is something Cat/Arb should have a field-day with, right?
--Ray
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I'm not slow; I'm special. (Don't take it personally, everyone finds me offensive. Yet somehow I manage to live with myself.)
I'm not a contractor, but the client account leadership team I'm part of provides staff augmentation for our client. In other words, most of the service our firm provides our client is warm bodies to fill out their IT staff. Over the years, we have gone from a relationship where we provided total solution in a single vendor environment (for the most part) to now where we are the largest vendor in their multi-vendor environment where people are simply resource commodities that they can request for a limited time project and then let go again. This is not the model our overall company operates on, so we have had an ever larger percentage of the human resources we provide our client come from our outside sub-contract contractor houses as opposed to our own internal salaried employees.
Anyway, here is what I came up with just looking at my own benefits package as a salaried employee:
1. Employers pay 7.65% of your gross salary / bonsues as social security. Of course, your contract house (who is cutting your checks) may also be required to pay the employer's share if you are their employee and not considered a sub-contractor. Check the contract language carefully, otherwise you will be responsible for paying the full 15.3% out of pocket yourself in the form of a self-employment tax. Plus there may be the Medicaid thing too, I'm not sure if that is part of it or not...
2. If you have an employer who actually has a traditional pension plan still, then depending on your years of service / etc or however it is calculated, that could equal several % of your gross salary / bonus. (e.g. currently, I'm at 4% in my employers defined benefit traditional pension plan)
3. Most employers offer some sort of 401K (or defined contribution plan). Matching varies by firm. Some may still do dollar for dollar, others may do fractional dollar for dollar (.25 or .50 per dollar contributed by the employee). Invariably, if the employer matches, they will have a vesting requirement that you have to be at the company so long before you own 100% of what they match / contribute to the plan. Of course, there are many companies that do not provide any matching, so the only expense they actually incur is the management cost to the company of having the plan.
4. The biggie is in benefits, like health, dental, vision, life, and disability insurance. In my case, what the company claims to pay towards these is nearly 20% of my gross salary. And mind you, I work for a Fortune 100. And they love to hold that out to the employees to say this is part of our magnamous compensation package (since we are paid below market in comparison to our competition). The thing is, I don't believe one who is considered "self-employed" as a contractor is going to get as good price on insurance as someone who is employed by a firm with tens of thousands of employees in a geographic area.
So, based on just these things, it may be fair to say that a salaried employee as opposed to a contractor "gets" benefits of equivalent value of around 30% of their salary.
Other things to consider with contracting, do you get paid if the contract house doesn't get paid by their customer(s)? Does the contract house keep a "bench" (in other words are you going to get some sort of paycheck from them even if you aren't on an assignment), or is your job solely based on working on a project and if you aren't on a project you aren't considered a contractor with them? What is the contract house's policy on non-compete? Will they allow you to work for another contract house in the area or for the same client if you determine you don't like working for them? Will they allow their customer to hire you as an employee? Will you have to travel? If so, who pays for it, and who will arrange the travel? Do you get paid vacation or unpaid vacation / days off from the contract house, and if the latter, are they still billing the customer for your time (flat monthly rate, or actual hours worked)? Do they offer bonuses?
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It seems to me the only thing you've learned is that Caesar is a "salad dressing dude."
The big costs for employees are insurances and workmans comp. Currently I have 31 people working for me. The health insurance premiums are based on the age of the individual being covered and the "rating" of our company based on past claims. Currently, I have some employees whose health insurance premiums each month are more than they make in two weeks. The health insurance is probably the single biggest expense for each employee and we have a pretty basic PPO plan. With 31 employees we do not have enough people to bargain with the insurance companies. Due to California regulation, only about three carriers do business in our area. I have had employees say they can get a better plan on their own. They never do because it costs even more to get insurance on their own. Personally, I think the wave the of the future may be HSAs or health savings accounts. For individuals and home based businesses they are a must. First you purchase a high deductible insurance with at least $1000 or more out of pocket before the insurance picks up anything. Then you put $1000 into your HSA account which grows with interest. If you need to go to the doctor you take the money out of the HSA to pay for it. If you don't use it you can keep it turning and add to it the following year. When you retire you can use the money you "saved" to buy a medicare suppliment or some such expense later in life. Kind of like a 401k for your health care. Generally these plans are better because the more expensive care is what is going to break you anyway and you can save thousands each year on health insurance with the high deductible.
Of course I can't convince several of my employees of this because they still want to go back to the days of $10 office visits and $5 prescriptions like when we had HMOs in the 80s. So now I get a semi front loaded plan with fewer major benefits because the rank and file are more concerned about paying half of an $75 office visit and not looking to paying 10-15% of a triple bypass surgury. Personally, I would rather pay half of $75 a dozen times a year than pay the 10% of a six figure triple bypass but I am often accused of being too preocupied with the future and long term concerns versus instant gratification.
The second biggest expense is workman's comp here in nazifornia. Governor Arnold made some changes that helped a bit but it is still some of the highest rates in the nation. These are based on the industry, occupation, and the all important "mod" factor which is based on past claims. The system is so frought with corruption and fake claims that rates have gotten really out of control. The insurance companies that provide work comp are few and far between. We only had two choices for carriers in 2005 and got 3 in 2006. One is State Fund or what is referred to as the provider of last resort. There were dozens of carriers in the past but they left the state because of the rules, regulations, etc.
The insurance carriers are pretty careless when it comes to fraud. They just want to do the very least and charge the most. Some businesses have banded together and began fighting back. They hired private investigators to film the allegedly hurt workers doing all kinds of crazy stuff away from work. They tried to give the footage to the carriers who did nothing and refused to even look. Finally they got local District Attorney's offices to pursue the case. Nothing like going to a work comp hearing and the employee doesn't show up because he is in jail for work comp fraud! Try explaining that one!
If you are self employed then get ready for the social security double whammy. You get to pay both the employee and the employer portions of the social security fiasco.
My secretary and I have spent nearly all the last two weeks doing year end paperwork for the government. In addition to the annual W-2 form we also had quarterly payroll tax returns which ran about 4 pages requiring a degree in accounting to decifer. Then there was quarterly payroll taxes which is a nice 10 page form which requires me to report sales to each county and city because they all have different sales tax rates plus any partial exemptions for farm equipment and labor sales which are also exempt. Then the was the annual FUTA report which was changed this year. The EZ version of the FUTA report was eliminated so now I had the two page report to do instead of the half page one which the folks in the Federal Government bragged about as having reduced paperwork in their materials they sent with the form. Then there is the quarterly Employment Development Department forms for dissability, unemployment, wages paid, taxes collected ect that has to be filled out for each and every employee. Then there was the annual EDD report to go along with the quarterly one. Then there was the tire tax report. We have to pay a tax for each new tire sold and since we sell tractors and each one has a at least 4 tires we have to send them money. I'm still waiting on the hazardous materials declaration form with it's $$$ requirements. Fortunately, I'm in an unincorporated area so no city to deal with and their myraid layers of paperwork and forms! Yea!
Also fun was adjusting payroll for several employees. The state in it's infinite wisdom raised the minumum wage and also the minimum wage for trained mechanics who are required to own their own tools to $15 per hour this year and $16 per hour next year. We let a guy go because he wasn't ever going to be good enough to earn $15 per hour.
Then with the other garage and liability insurance it was no wonder my dad commented this morning that, "This is the reason people don't start businesses anymore."
Even as self employed you will need to pony up for all the insurances and other permits, taxes, and fees required by your particular state. Plus you get to be the person who fills all that mess out yourself instead of playing ball with your kid on a Saturday! Then you will get to bang your head on the table when trying to explain where you are lost on page three, box 61 of the quarterly tax form and they have no idea what you are talking about.
As soon as hunting is banned in California, we are moving to Texas! Keep the crazies out until I get there Roper!
I had the same question as Roper. Thanks for the clarification, Euphrasie. But then, maybe I'm one of the crazies?
That 30% will probably eaten up easily by the costs of going self-employed as a contractor between taxes and benefit costs. Definitely reflect on that fact and explore some of those costs as you look at your options. It costs you nothing to get an individual health insurance quote for you and your family to add up to the other costs you take on when self-employed.
As far as health insurance goes, it really varies from place to place, largely due to the various state mandates placed on health insurance companies. Group insurance paid by your employer is, of course, cheaper than individual health insurance paid totally by you. I highly recommend the high deductible HSA compatible plans as the HSA (Health Savings Account) contributions are 100% tax deductible and can be used for any tax-qualified expense (as determined by the IRS). In other words, the HSA funds can be used for vision, dental, some alternative forms of care and etc. that may not be covered by the health plan itself. Where it may not be good for you is if you are unable to adequately fund the HSA. However, normally, the amount of money you save by going to a high deductible and losing the copays (both physician and prescription - though some plans allow for prescription copays to kick in once the deductible is reached) can be used to fund the HSA, providing you with more flexibility.
First off, let me say that my experience may or may not have anything to do with your situation.
But, in my experience, contracting generally pays higher than salaried work, even with the contracting companies where you get benefits, paid days off, etc. It can pay significantly more.
There are generally two types of contracting work (in my experience), and they are identified by the tax form that you get at the end of the year. With W2 contracting work, you are considered an employee of the contracting agency, and they pay the employer portion of the taxes. They may also provide some benefits, but usually they do not. Then there is I9 contracting work. That is where you are considered to be self employed. You invoice the client for the work you perform and get paid accordingly. As an I9 contractor, you pay all your own taxes, etc.
In my experience (again, this may totally not relate to your situation) W2 work is much, much more common than I9 work. You may ask yourself, why would anyone consider I9 work? Because the rate that is billed the client for the contracting work is so high. As an I9 contractor, you keep the cut that the agency would have kept. And their cut can be significant. I worked for one company that billed the client for my time at $100 an hour, out of which about $32 was my cut. Granted, they gave me benefits, time off, paid training, etc. But their cut wasn't bad at all.
If you're offered W2 contract work, ask if you can buy benefits through your agency, if they don't provide them. Certain agencies won't pay for your benefits, but they'll let you buy insurance through them. That allows you to get their lower rate. Then again, with certain companies, you're totally on your own as far as benefits.
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If ye love wealth better than liberty, the tranquility of servitude than the animated contest of freedom, go from us in peace. May your chains sit lightly upon you, and may posterity forget that you were our countrymen! - Samuel Adams
Then you will get to bang your head on the table when trying to explain where you are lost on page three, box 61 of the quarterly tax form and they have no idea what you are talking about.
Woohoo! I love taxes! As soon as that W2 gets here.... 
But then, maybe I'm one of the crazies?
