How Much Does an Employee Cost in the USA?

How Much Does an Employee Cost in the USA?

You may have heard that the current US Administration is working towards lowering the cost of employees in the USA whereas a few years ago, the Obamacare laws were pointed at for burdening employers’ budget. So, what can you expect as you hire an employee in the USA?

CHALLENGES:
  • Getting to know the various employment taxes that apply to your recruitment plan and estimating their amount

  • Understanding who is responsible for paying these taxes: withheld taxes, employer’s contribution, and employee’s contribution

  • Estimating the additional costs: state insurance, health insurance, and the 401(k) retirement plan

Estimating employer charges in the USA

Employment taxes are the taxes that you, your business, and your employees must pay to federal, state, and local agencies. Some taxes, you just withhold from employee pay and turn over to the taxing authority. Other types of employment taxes must be taken from employee pay and also paid by you, the employer.  And still others are your responsibility as an employer, but employees don’t contribute to these.

Before you set up your payroll system and hire your first employee, you need to know about the different types of employment taxes. Additional contributions from the employer may be required by some states, and you also need to plan for employees’ benefits which are a condition for attracting and retaining talents.

1 – Employment taxes at the federal level

FICA taxes

All U.S. employers must deduct FICA tax amounts from paychecks of all employees and pay both employer and employee portions of these taxes.

Social Security:

  • Amount = 6.2% of the first $128,400 earned by the employee (limit for 2018)
  • The Social Security Act was signed in 1935 by President Franklin Roosevelt with the goal of providing benefits to retirees, disabled people, and their survivors as the US economy suffered from the Great Depression. The Act gave birth to the Social Security, or OASDI (Old-Age, Survivors, and Disability Insurance) program which has been continued.
  • The OASDI tax can be seen on the payroll journal issued by your payroll provider.

Medicare:

  • Amount = 1.45% of the total compensation earned by the employee (no limit)
  • Enacted in 1965 under the leadership of President Lyndon Johnson, Medicare aimed at providing health insurance to Americans aged 65 and older who have worked and paid into the system through the payroll tax. The program has been extended to provide health insurance to younger people with some disability status.
  • The Medicare tax can be seen on the payroll journal issued by your payroll provider.

FUTA taxes

Employees do not contribute to these taxes.

  • Amount = 6% of the first $7,000 earned by the employee (limit for 2018)
  • The FUTA (Federal Unemployment Tax Act) aims at providing support to workers who have lost their jobs. Employers report this tax by filing the annual Form 940 for the IRS.
  • FUTA covers a federal share of the costs of administering the unemployment insurance and job service programs in every state (SUI).

2 – Employment taxes and insurance at the state level

SUI taxes

As previously mentioned, FUTA taxes and SUI taxes work together to provide benefits to unemployed workers. Employees do not contribute to these taxes.

  • Amount = X% depending on the states (see example in par. 4 of this article)
  • The State Unemployment Insurance is mandatory and requested from companies to cover the cost of unemployment claims by their former employees. As for drivers who collect car accidents, insurance rates are higher for businesses that dismiss a lot of employees.

State insurance

There are 2 types of state insurance: the workers compensation and the disability insurance, which are paid by the employer. They are mandatory in some states, and optional in other states (but highly recommended to protect your company).

Workers compensation:

  • Amount = X% depending on the states and the job classification (see example in par. 4 of this article)
  • Employers are required to finance state-run programs that provide benefits to employees who incur illnesses or injuries because of their work. We recommend that you check whether the workers compensation is mandatory or not in the state where you intend to have employees as penalties can be significant (the workers compensation is mandatory in New York State for instance).

Disability insurance:

  • Amount = X% depending on the states (see example in par. 4 of this article)
  • Disability insurance offers income protection to individuals who become disabled for a short-term period (< 3months), or a long period of time (> 3months), and as a result can no longer work during that time. The employee’s salary is then covered during the time of disability under the conditions set by the state insurance.

3 – Additional costs: health insurance and retirement plan

Health insurance plans

In the USA, employers have the option to offer a health plan to their employees. Although it is not mandatory for companies that have fewer than 50 full-time employees on their payroll, 75% of European companies that set up a US entity provide their employees with a medical, dental, and vision plan. It is indeed a condition for attracting and retaining talents in the USA given the current health care system.

Retirement plans

American employers have the option to offer a retirement plan, also known as 401(k), to their employees. Although it is not mandatory, most European companies that set up a US entity provide their employees with a retirement plan as they compete with US companies to recruit high-skilled candidates.

4 – Is there any opportunity for tax optimization?

The best way to optimize the cost of your workforce in the USA may be to focus on your US employees’ salaries instead of trying to optimize employer charges. You will find below a breakdown for taxes, insurance, and benefits in 3 different states (New York, California, and Colorado) and you will indeed see that employer charges roughly amount to 25% of the employee’s gross salary.

Unlike employer charges, salaries vary a lot from one state to another, so we suggest that you shift your attention towards estimating your future US employees’ salaries as you consider optimizing the value of your HR budget. See how to do it in Defining Your US Employee’s Salary.

Estimated cost of an “outside sales representative or office clerc” (US nomenclature) in NY, CA, and CO. Base salary was set as $100K/year for readability purposes:

How much does an employee cost in the USA - Comparison by states

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Disclaimer: The materials provided in this US Toolbox are for general information purposes only and are not intended to constitute comprehensive or specific legal, accounting, tax, marketing, or other advice. These materials may not reflect recent developments in the law, may not be complete, and may not pertain to your specific situation and circumstances.TradeSherpa, Inc. assumes no responsibility for errors or omissions in the materials, or for any losses that may arise from reliance upon the information contained these materials. Because these materials are intended to provide only general advice, specific advice should be taken from qualified professionals when dealing with specific situations and circumstances. 

2018-07-06T19:48:50+00:00