Have you ever noticed that employee labor cost easily makes up a large portion of the expenses of your business? Employee labor cost goes much further than just an hourly wage. On top of hourly wages, you’ll also pay additional fees and taxes for each employee. Even though your employees are one of the most expensive aspects of running a business, they’re often more-than worth the cost in terms of value they provide to your business.
Labor is Not Cheap
Good, skilled labor certainly isn’t cheap, but then again why should it be? For someone to continuously provide a service to a level that isn’t easily replicable, it requires them to spend upwards of several years to hone that skill.
When you pay your employees, you’re not only paying them an hourly wage for the service they provide, but you’re also paying for the experience and expertise that comes with them. If people weren’t justly rewarded for performing services better than others, there wouldn’t be any reason for employees to work harder than their peers.
With this in mind, a reward structure is necessary for great performance, but that doesn’t mean that it will be cheap or easy for you to institute. This means that employee labor is an expense that you’ll need to bite the bullet on and find other ways to compensate for.
What Goes into That Cost?
The question that surfaces most when it comes to employee labor cost is what that actually refers to. You pay your employees an hourly wage or salary, but that is only one aspect of employee labor cost (albeit the biggest). In addition to an hourly rate, there are also taxes that you as an employer need to pay for your employee, which can dramatically raise the overall labor cost.
Here are the most important aspects of determining employee labor cost:
- Hourly or Salaried Rate – Although it doesn’t make up the entire employee labor cost, the hourly or salaried rate you pay to employees is the biggest contributor to determining what your total cost will be. With a higher hourly wage, your payroll disbursements will directly increase. Because your tax rate applies to the overall amount of wages paid, a higher total value with also result in more taxes owed.
- Employer Taxes – The other crucial part of employee labor cost is the tax that you as an employer are responsible for. When an employee receives their paycheck, taxes are often already deducted from them. These taxes are taken from the employee though, but you too are also responsible for a similar amount of tax for that paycheck. The combination of an employee’s deducted taxes and what you’ll need to pay is what makes up the total tax obligation.
- Benefits – Wages and taxes are often the two most expensive factors for employee cost, but there are also a few indirect factors that can have a significant impact. One of those is the benefits that you offer to your employees. If this is a benefit like health insurance, you can easily identify how much each employee costs to cover. If it is something less obvious like vacation time, you’ll have to find a way to assign a cost to a day of vacation. This is usually equal to how much value an employee creates on any given day.
- Supplies and Equipment – Supplies and equipment are another indirect factor that can affect total employee labor cost. Are you making unnecessary office equipment purchases to satisfy employees? Perhaps printer ink is disappearing much faster than it should be. Supplies and equipment aren’t an employee expense, but when your employees cause extra expenses because of their own personal desires or interests, it can become a noticeable part of employee labor cost.
Employees Can Be Your Greatest Asset
Even though your employees are definitely expensive, all the money you spend to employ them should go to great use. In theory, every dollar you pay to employ someone (including all aspects of employee labor cost) should result in more than a dollar earned by your employee. Hopefully your employee is earning you far more than that, but dollar for dollar is the minimum amount needed to justify having the employee.
There are a few reasons why labor is so expensive, but the most relevant and obvious one is that employees add value to your business that you cannot. Perhaps you lack the skill, or maybe you just don’t have the time. Employees are essential to growing your business and making it sustainable.
What makes your employees so special is the fact that they are their own unique person. This means that they’ll come to your business with their own unique history and experience, which provides them with a unique perspective that can offer you insight you might not have otherwise thought of before. Some people are also better at things than others, meaning that they just might be better at a certain function of your business than you, which makes it even better for you that they are doing it instead!
Are You Overpaying for Labor?
In order for anyone or any business to succeed, they need to understand the benefits of cooperation. The pyramids weren’t built overnight, nor were they built by just one person. It takes a team of committed, motivated individuals in order to make big things happen.
Operating a business is no different. As a business owner, you are undoubtedly the driving force of your business. At the same time, you are still human and are limited by the biological needs of your body. There are so many hours in the day, and only so long that you can work and focus for before needing rest.
If you want to grow a successful business, then you need employees. Not just any employees, but ones that provide you with genuine value that makes their labor cost worth it. Employees are the only way of extending the knowledge and capabilities of your business, while also adding a personal flair.
Each employee you hire is unique, and will come with their own set of qualities and strengths. It is important to understand this and weigh it against the cost of actually employing this person. They must generate more than they cost, whether it be through direct sales, saving money, or providing alternative value.
Evaluating employee labor cost can be difficult when you are deeply entrenched in your business. Fortunately the accounting experts at Evergreen CPAs are well-equipped to give you a seasoned external perspective! Supported by several years of experience and successful accounting solutions, Evergreen CPAs have all the tools needed to help your business take the leap to the next level!