Many people think about starting their own business because they feel their current employer is making too much off their work. It’s a common thought, but it’s important to understand that the true cost of employing someone goes beyond just their salary.
Here’s the reality: your employer’s costs include Medicare and Social Security contributions, benefits, and other operational overhead. In fact, the direct costs of having an employee can be up to 47% more than their salary. This figure can vary based on things like family health insurance coverage and the benefits the employee uses. Plus, there are indirect costs like office space, furniture, equipment, and supplies.
Before you decide to leave your job and start your own business, it’s crucial to calculate your true cost to your employer. This way, you can avoid underpricing your services and working more for less. Let’s go through an example to see how this works:
Assumptions:
- Your current annual salary is $62,000, which breaks down to about $29.81 per hour (based on the average US salary of $59,384 and an hourly wage of $29.81 at the end of 2023).
- You receive 15 paid vacation days, 8 sick days, 4 personal days, and 8 paid holidays.
- Your employer contributes $395 per month towards Social Security and Medicare, $800 per month towards health insurance, and $230 per month towards your retirement account.
Here’s how to calculate your true cost to your employer:
- Days Worked Per Year: If you work 52 weeks a year, minus your time off (15 vacation days + 8 sick days + 4 personal days + 8 holidays), you end up working 225 days.
- Direct Costs of Employing You: Combine your salary with your employer’s contributions: $62,000 + (($395 + $800 + $230) * 12) = $62,000 + $17,100 = $77,100.
- Average Cost Per Day Worked: $77,100 divided by 225 days = $342.67.
- Average Cost Per Hour Worked: $342.67 divided by 8 hours a day = $42.84.
To match your current net income of $29.81 per hour, you’d need to charge at least $42.84 per hour if you were self-employed. That’s a 44% increase over your current rate.
But remember, your employer has to cover additional costs beyond just your salary. They need to account for:
- Office space rent
- Support staff (like receptionists or HR)
- Office equipment and maintenance
- Office supplies
- Business insurance, worker’s compensation, and unemployment insurance
- Utilities
- Communication expenses
- Subscriptions
- Business license and registration
- Automobile expenses
- Professional development
These overhead costs can vary depending on your industry and whether you’re working from home or renting office space. On average, overhead can range from $12,000 to $18,000 per employee per year. For simplicity, we’ll use $15,000.
Adding this to your direct costs: $77,100 (direct costs) + $15,000 (indirect costs) = $92,100. This breaks down to about $51.17 per hour.
When you’re self-employed, you only get paid for the hours you actually work, and you don’t get paid time off. You also have to handle all the administrative work yourself. So, to cover all these costs and still make a profit, you need to set your rates significantly higher than you did as an employee.
By running these numbers, you’ll get a clearer picture of the true cost of self-employment versus being an employee. It helps you understand what you need to charge to cover your expenses and make a profit if you decide to go solo.
If you have any questions or need further clarification on this topic, feel free to drop them in the comments below. I’d be happy to help out!
Susan's Reflections 