The United States has one of the world’s leading economies, a massively skilled workforce with specialized knowledge, and a generally business-friendly environment that fosters growth.
Companies can benefit in several ways by hiring skilled American workers and accessing unique perspectives. However, there are several factors employers will need to consider when calculating the average cost of hiring American employees.
Employers that employ workers in the United States will be responsible for covering various costs and ensuring that certain responsibilities are met. Additionally, businesses will need to understand the differences in federal and state laws to remain compliant when expanding their team.
There are certain important costs to factor in when hiring in the United States. This will tell you everything that’s important to know.
What are Hiring Costs?
Employers that want to expand their business will need to cover the necessary costs for hiring employees overseas. The associated costs include more than just the employee’s annual salary or hourly wage. The cost of hiring in the United States depends on the benefits you provide, the necessary taxes your company must pay, and other factors such as labor costs.
The necessary costs of hiring an employee will vary depending on your industry, business size, the expertise or skill set required for the role, your business location, and more. According to recent studies, the average cost per hire can be 1.25 to 1.4 times the expected salary for the position. This means that if you want to hire an employee, you’ll be required to pay for much more than the employee’s salary.
When calculating employee costs, certain costs are mandatory and others are considered supplementary employer costs for employers in order to remain competitive when recruiting.
Employees living in all jurisdictions – in addition to their wages or salary – are eligible for various other benefits, such as health insurance, and employers are responsible for providing the required coverage. This is where an Employer of Record such as Borderless can help, as we will handle all the complicated aspects of hiring and onboarding new employees, such as payroll, taxes and benefits administration.
Average Cost of Hiring an Employee in the United States
While an employee’s personal income taxes are not considered a cost of hiring for employers, companies will need to take care of other financial obligations. The actual cost of hiring an employee in the US will need to be considered by companies that want to gain access to the market or add new members to an existing US-based team.
If you’re hiring in the United States, the average cost to recruit and onboard an employee is around $4,000. However, there are several factors that are important to know because the required amount can vary. In some cases, employment-related costs can be as high as $20,000.
For example, larger companies may have to pay more for an employee, and companies located in megacities such as New York City may need to provide higher salaries or more comprehensive benefits packages to remain competitive when hiring.
Additionally, companies may have to pay fees to the employment companies they use to connect with or recruit top talent from around the world. These can include an employer of record or a professional employer organization.
What is a Fully Loaded Cost of Employee in the United States?
Companies that want to hire in the United States will need to be aware of the fully loaded costs of employees. Fully loaded costs include every aspect of what an employer will be responsible for covering, which includes the base salary, additional benefits, taxation requirements, bonuses, work compensation insurance if applicable, overhead costs, and more.
The fully loaded cost of an employee is essentially the grand total of all expenses a company must cover when hiring an employee or independent contractor.
Mandatory Costs of Hiring an Employee in the United States
These costs are required by law, and all employers hiring in the United States must abide by them to remain compliant with local labor laws. Failure to do so could result in certain penalties, such as harsh fines, reputational damage, sanctions against hiring employees in the future, and legal punishment.
FICA Taxes
The Federal Insurance Contributions Act (FICA) stipulates that all employers are required to contribute a certain amount of each employee’s pay to social welfare programs. This is a necessary payroll deduction for anyone who wants to add skilled American workers to their team.
FICA taxes are withheld as a contribution to certain programs, such as Medicare and Social Security Taxes. Generally speaking, employers are responsible for providing:
- 6.2% of the employee’s income towards social security
- 1.45% towards medicare
Employees are also required to provide contributions to these programs. Workers contribute at the same rate. In 2023, the Social Security wage base is $160,200, meaning employers must cover the necessary contributions up to this amount. Medicare tax does not have an earnings limit.
Certain payments are excluded from FICA taxes, including:
- Qualified retirement plan contributions
- Services performed by students employed by an educational institution
- Serves done by minors who work for their parents
- Some church or church-controlled wages
- Some governments salaries who are entitled to a pension
Federal and State Unemployment Taxes
Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) taxes are other factors that may impact the average cost of hiring an employee in the US. Employers are required to pay a 6% tax towards federal unemployment for the first $7,000 of remuneration to each employee throughout the year. Any earnings beyond this are not taxable.
Companies must also pay additional taxes under the State Unemployment Tax Act. In most states, employers are entirely responsible for paying SUTA taxes, though states such as Alaska require employees to make contributions as well. SUTA tax rates in 2023 can range from 0.7% to 18.78%, depending on the jurisdiction.
Additionally, different states can have varying wage bases for taxation. For example, the SUTA tax in Florida only withholds from an employee’s income for the first $7,000 they earn, while employees in Idaho have a significantly higher wage base of $49,900.
Leave Entitlements
Companies that have more than 50 employees on their payroll are legally required to offer certain leave entitlements.
Under the Family and Medical Leave Act (FMLA), employees who have worked for the same company for at least one consecutive year are entitled to a certain amount of annual paid vacation. There are no federal requirements for paid time off, but American employees receive around 11 days of paid time off on average, depending on the job and industry.
Employers must also provide additional forms of leave. In the United States, new parents can take up to 12 weeks of unpaid parental leave. During this time, employees are protected from termination, which ensures equal employment opportunities regardless of the worker’s gender.
In addition to birth, employers must grant this time off for:
- Placement of the child for adoption or foster care
- Caretaking of an immediate family member with a serious illness, such as a spouse or parent
- An employee who must take time off of work due to a serious health condition
It’s also important to know that US-based employers are not obligated to provide paid sick leave to employees. Generally, overtime rates are no less than time and one-half of the employee’s regular rate of pay. This can also influence the total cost when you calculate employee costs in the United States.
Wages
Employers in the United States will also need to abide by all the rules and regulations that govern minimum wage. The US has a federally mandated minimum wage of $7.25 per hour. The actual minimum wage can also vary depending on the state.
However, companies that want to recruit skilled workers will likely need to pay much more to remain competitive when hiring. In 2023, the average national salary in the US was $59,428, or roughly $28.34 per hour.
Employers will also be responsible for providing overtime premiums to employees who have worked more than 40 hours in a week.
Worker’s Compensation
Workers’ compensation is another mandatory employee cost for employers to consider. Generally, the costs will vary between states.
Workers’ compensation is a federal program that provides employees with benefits if they get hurt or sick on the job. Benefits can include cash payments, healthcare coverage or reimbursement, survivor benefits, and more. Employers should also know that workers who agree to receive compensation waive the right to pursue legal action for negligence.
There are two main types of workers’ comp in the US:
- Coverage A: This includes all state-mandated benefits that an injured or sick employee is entitled to receive, such as salary replacement payments, medical care, and any other applicable benefits.
- Coverage B: This pays benefits that exceed the minimum amount required by Coverage A and usually only occurs after a successful lawsuit by the employee.
Retirement Plans
Contributing to retirement savings plans is another aspect that must be considered when calculating employee costs in the United States. There is currently no federal requirement for companies to offer retirement plans, although employers must offer state-sponsored retirement plans if they’re not in one of ten states with active retirement laws.
In these states, employers could be subject to financial damage if they fail to offer an appropriate plan, which can add on to the mandatory costs of hiring a new employee.
Examples of common retirement or savings plans include:
- 401(K): This is a tax-defined contribution plan that allows employers and employees to make contributions. There are currently five different types, and each option offers distinct tax advantages. The maximum contribution amount is capped based on the employee’s wages.
- Individual Retirement Arrangements (IRA): This is an alternative program for retirement that allows individuals to save with tax-free growth. There are several types of IRAs available to choose from. This is a good choice for smaller companies or self-employed individuals.
- Thrift Savings Plan (TSP): This is an employer-sponsored retirement program that’s only available to federal employees and uniformed service workers. The annual contribution limit in 2023 was $22,500 for employees under 50, and contributions can be made with pre-tax dollars.
Alternatively, employers may choose to offer a defined benefits program instead of a defined contribution plan. Benefits plans provide a fixed and determined benefit for employees upon retirement, which is usually based on several factors, such as the worker’s length of service and salary. Employers can also typically contribute and deduct more than other retirement plans.
Pension plans are one of the most common examples of benefits-related employer costs for employees. The employer makes contributions on behalf of the employee throughout the employee’s tenure. The worker cannot access the benefit until after retirement, and they can choose to receive payments as a lifetime annuity or a one-time lump sum at a specified age.
Employers may also consider a cash-balance plan. This provides employees with a set account balance after retirement instead of a determined annuity or lump sum. Workers are entitled to up to a certain amount.
Income Taxes
When considering how much an employee costs, employers also must understand the tax requirements and obligations of each worker. Employers are responsible for handling all the necessary income tax deductions for American employees.
In 2023, the tax brackets in the United States are:
- 10%: incomes up to $11,000
- 12%: incomes between $11,001 and $44,725
- 22%: incomes between $44,726 and $95,375
- 24%: incomes between $95,376 and $182,100
- 32%: incomes between $182,101 and $231,250
- 35%: incomes between $231,251 and $578,126
- 37% incomes exceeding $578,126
Employers will also have to know about the tax laws for specific states. For example, workers in Florida can be exempt from income tax withholdings.
Supplementary Costs
These are not federally mandated employer costs for employees, but companies can gain key advantages by providing additional benefits. Organizations that offer a more comprehensive range of benefits can experience improved success when recruiting, better retention rates, and higher employee engagement.
Many companies offer medical insurance for each employee. Popular supplementary employer-sponsored healthcare coverage can include:
- Dental
- Vision
- Prescription drugs
- Hospital Indemnity
Several employers also choose to offer workers compensation insurance, additional paid time off or remuneration options, which can include bonuses and stock options.
Some companies also provide employees with fringe benefits. These can include gym allowances, a work-from-home stipend, team-building expenses, and more.
Additional Costs to Consider
Companies may have to invest additional money during the hiring and onboarding process, which can impact how much an employee costs.
Organizations will be responsible for ensuring that new hires understand company-specific policies and job expectations, meaning employees will need to be trained prior to starting. On average, it takes around 33 hours to fully train new employees, and companies spend about $1,252 to train each worker. However, the actual amount will vary depending on the size of the company and the new hire’s working experience, among other factors.
Companies that want to expand may need to pay for factors such as office space or equipment to accommodate a larger workforce as well.
Legal and Regulatory Compliance
Businesses that want to hire in the United States will also need to ensure they comply with local labor laws. Noncompliance penalties can include fines and legal action, potentially increasing the employer costs for employees.
For example, companies that engage employees and independent contractors will need to make sure that each worker is properly classified. It’s also important to remember that there are federal and state laws that must be obeyed to keep you out of trouble.
What Can an Employer of Record Do for You?
Employers of record are an excellent solution when it comes to hiring in the United States. Your employer of record can help you understand the average cost of hiring an employee in the US and navigate the entire hiring process.
Employers of record handle all difficult or unclear aspects of expanding your team. This means that your employer of record will handle all payroll requirements, tax deductions, termination procedures, and more.
Your employer of record also has comprehensive knowledge regarding the local labor laws in the country you want to hire from. With your EOR’s guidance, you can be sure that your company remains compliant at each step. Companies that choose to partner with an employer of record will drastically reduce the risk of employee and independent contractor misclassification.
Why Borderless?
Borderless is an employer of record that offers an extensive range of services that are designed to make it easier to hire employees. We offer expertise in various aspects of employment and can help you legally hire in 170+ countries worldwide.
Speak with our team today to see how we can help you.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
