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Considering Hiring? How Much Does a New Employee Cost a Small Business

In image of a small business owner hiring a new staff member for his team.

Small businesses and startups often hesitate to hire an employee because of the significant cost. Some enterprises go overboard, hiring too many employees in anticipation of an order win. Whichever side you are on, it is essential to give hiring a thought, as there is more to the employee cost than just salary or wage. Having a rough estimate of the cost of an employee can help you determine the expected outcome from the employee and understand if it adds value to hiring more employees.

Several studies show that a company takes six months to recover the cost of hiring an employee. This article will discuss the various direct and indirect employee hiring costs.

How Much Does It Cost to Hire an Employee in Canada?

The most significant cost in hiring is salary. In Canada, every employer has to follow minimum wage and mandatory deductions if the employee is on a payroll.

Salary

Salary is the amount you can calculate hourly, weekly, or monthly. When determining the salary bracket for a new employee, ensure your business has sufficient cash flow to pay a timely salary. Salary should be competitive enough to attract talent and affordable sufficient for the company to sustain its cost. Salary may differ based on the employee’s position, experience, and skill and how much return the person can bring. A professional accountant can guide you on salary structure – fixed and variable components based on an employee’s productivity, quality, and creative thinking.

Determine the salary amount wisely, as it will form the base for the other direct costs like benefits and income tax.

Mandatory Benefits

The Canada Revenue Agency (CRA) requires all employers to contribute towards the Canada Pension Plan (CPP) and Employment Insurance (EI) and also deduct employee contributions from their salary. As an employer, you will deduct 1.63% in EI and 5.95% in CPP from the employee’s salary as part of the employee contribution in 2023.

For 2023, CPP employer contribution is 5.95% of base salary above $3,500 and up to $66,500. The maximum employer CPP contribution for 2023 is $3,701. However, the maximum pensionable income and CPP contribution rate will increase under the CPP enhancement program. As for EI, employer contribution is 2.282% on salary up to $61,500. The maximum employer premium for EI is $1,403.43 for 2023.

An employee with a $50,000 annual salary will cost the small business $53,907.75 (salary + EI + CPP).

  • EI employer contribution = $50,000 x 2.282% = $1,141
  • CPP employer contribution = ($50,000 – $3,500) x 5.95% = $2,766.75

But there are more costs than mandatory benefits.

Other Benefits Offered to Employees

Small businesses must offer more than just CPP and EI to attract skilled workers. In Canada, employee benefits packages cover several types of insurance like health, vision, dental, and life for a single employee and family. However, you can control the cost of such insurance by considering group plans with 80% coverage instead of 100%.

You can explore various plans with the insurer and choose the one that best suits your work environment. Some workplaces are risky, like a factory or construction site. They need special insurance coverage. And in such places, the employer also has to invest in workplace safety.

Some employers offer other perks like stocked kitchens, game rooms, and wellness initiatives to retain employees. These benefits might look like an extra cost. But if they can have employees, it brings you more considerable savings in hiring costs.

Recruiting and Training Cost

As said before, businesses give several perks to retain an employee because recruiting and training costs are far more significant, and you cannot be sure to get the right talent.

In recruiting, you first give advertisements, take job portal subscriptions, hire an internal recruiter, conduct pre-employment assessments and interviews, and do drug screening and background checks. The cost of recruiting may differ depending on the position. There are headhunters for management-level positions. You can also hire external recruiters who may charge you a commission between 15% and 30% of the first-year salary of the hired employee.

The recruit will need training irrespective of how skilled they are. There is a learning curve wherein your employees will have to spend time training the new employee, which leads to lost productive hours. Companies also spend on qualifying new and existing employees to upgrade their skills.

When calculating the training cost, include both structured training cost and the time managers and key coworkers spend to train the new employee to reach 100% productivity. And if the employee leaves in a short period of time or is deemed unfit for the job, this cycle repeats.

Workplace Integration and Other Costs

Once the employee is onboard, there is a set-up cost involved. When calculating the cost of an employee, you should also include the cost of a work desk, software, mobile, travel, and any other resources required for the job. The company also offers paid leave and vacation days. Two weeks of paid leave and five sick days are mandatory in Canada. Employees also bring in additional paperwork, as employers have to give them T4 forms, offer letters, and other formalities.

Hiring an employee is expensive, but it has its perks. You can hire skilled employees and give your business the best opportunity to grow. If the work is temporary, you can also hire freelancers or third-party contractors to skip other costs and pay only for the work.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Payroll and Workforce Planning

A professional accountant can help you work the cost-benefit analysis of employing a workforce. The experts are updated about CRA laws related to payroll calculation. They can help you set up a payroll process and do a cost analysis to help you make a financially sound decision. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with payroll and workforce planning, contact us online or by telephone at 905-517-2297.