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Are you ready to bring your first employee on board?
Expanding your one-person team to become an employer is one of the most significant growth milestones for any business owner. It’s a thrilling step forward. It’s an anxiety-inducing unknown. And without proper financial planning in advance…
It can sink you like a rock.
The good news is that with the right financial roadmap, this transition doesn’t have to empty your bank account. Small business health insurance and other employee costs are manageable when you know what to expect.
Here’s how to do it the right way:
What You’ll Learn
- Calculating the Full Cost of Your First Employee
- Why Health Insurance is the Secret to Attracting Good Talent
- How to Budget for Employee Benefits
- Strategies for Managing Employee Costs
Calculating the Full Cost of Your First Employee
On average, business owners significantly underestimate the cost of hiring an employee.
Sure, there’s the salary you offer. But did you know that according to SHRM’s 2024 report the average total cost to hire an employee is $4,683 before they even start working? That’s just the recruiting, screening, and onboarding expenses.
Yet here’s where things get really interesting…
Benefits generally add another 30% on top of the base salary. And when you include things like health insurance, retirement contributions, legally required taxes, and worker’s compensation insurance a $50,000 employee typically ends up costing closer to $65,000 total.
Here’s the average employee cost breakdown:
- FICA taxes – 7.65% of wages for Social Security and Medicare
- Federal unemployment (FUTA) – 0.6% after credits
- State unemployment – varies by location
- Worker’s compensation insurance – legally required in 49 states
- Health insurance – the wild card
Notice a theme here? The biggest cost surprise for most small business owners is understanding their options for small business medical coverage before the first hire. Knowing what’s available prevents those nasty health insurance sticker shock moments down the road.
Why Health Insurance is the Secret to Attracting Good Talent
You can almost guarantee yourself above-average talent by offering health insurance to employees.
The reality is that currently, only 53% of small businesses offer health insurance while an astonishing 98% of large companies provide it. That 45% gap gives big businesses an enormous leg up when competing for skilled workers.
Dig into some of the statistics a bit further…
Companies that provide health insurance are 13% more likely to report that they have no problem finding employees. They are also 25% more likely to say their employees exceed performance expectations.
Hard to argue with those numbers.
Offering health insurance is great, of course, but it does come at a cost. Premiums for employer-sponsored health insurance hit $1,232.59 monthly for family coverage at small firms in 2024. Single coverage averages $528.84 monthly. Those are not insignificant figures for a small business still assembling their team.
The situation will only become more challenging for small firms year over year.
Premiums have been creeping steadily upwards over time. Insurance companies keep exiting the small group market every year. Small business owners continue to have a tougher time keeping up with their larger competitors on this front.
So how do you get around that?
How to Budget for Employee Benefits
Budgeting for all those employee costs starts before the job posting goes live.
Start by factoring in the total cost of an employee. Look at the base salary and multiply by 1.3 to account for benefits costs and payroll taxes. This 1.3 multiplier gives you a realistic idea of how much each person on the team is going to cost the business.
For example:
- Base salary = $45,000
- Benefits multiplier = 1.3
- Actual annual cost = $58,500
Then include the one-time hiring expenses like recruiting fees, background checks, equipment purchases, and training. Budget out at least $5,000 for these costs in year one.
At this point, the health insurance decision needs to be made. Small business owners can explore a few different options when it comes to benefits packages:
- Traditional small business group health plans – Higher cost, but more comprehensive
- Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) – Reimburses employees for individual health plans up to set limits
- Individual Coverage Health Reimbursement Arrangement (ICHRA) – Flexible reimbursement options
- Association health plans – Join with other small businesses for shared plans
There are different costs and administrative requirements for each of these health insurance options. The decision comes down to budget, needs of the employee pool, and how much complexity the business can manage. Every small business is different.
Cash flow timing is also essential to consider. Employee expenses hit every pay period, of course. Health insurance premiums need to be paid every month. It is a smart move to build cash reserves equal to three months of total payroll costs before hiring that first person.
Strategies for Managing Employee Costs
Managing employee costs over time calls for strategic thinking.
The hiring process itself should not be rushed. Bad hires cost you money twice. Once for onboarding and again for replacing them. Sloppy decision-making on this front ends up costing thousands more in turnover.
Role structure also matters. Does that position need to be full-time with full benefits? Part-time employees and independent contractors have different cost structures. Sometimes delayed hires or phased ramp-ups make more financial sense than jumping immediately to full-time.
Shopping aggressively for health insurance is a must as well. Rates can vary wildly between carriers and insurers. Get multiple quotes and work with a broker who understands small group coverage needs. Every percentage point difference on those premiums adds up over the long haul.
There are also tax credits that you can investigate. The Small Business Health Care Tax Credit offers up to 50% of premium contributions for small businesses with fewer than 25 full-time employees and average annual compensation below $56,000.
Bundle the benefits package smartly as well. Some insurance carriers offer significant discounts when purchasing multiple products together. Health insurance, dental, vision, life, and more can all be combined for cost and administrative simplicity.
Finally, don’t neglect planning for annual increases. Health insurance premiums are not a static cost. Budget for 7-10% increases annually in your financial projections.
Wrapping It Up
Going from one-person operation to building a team needs careful financial planning beforehand. Costs are much more than just salary. Between one-time hiring expenses, payroll taxes, health insurance premiums, and other employer contributions your first employee is a sizable investment.
Yet here’s the thing…
When done thoughtfully this investment begins to pay dividends over time. Quality employees not only drive more revenue, but they also take on routine tasks to free up the owner’s time. They add value to the company in all kinds of ways that help move it forward.
The key is to go into it eyes wide open. Know the true total cost before making any commitments. Budget before you start the job posting process. Decide strategically on health insurance offerings. Plan for natural cost increases over time.
Reviewing the highlights:
- Budget at total cost of 1.3x base salary for every employee
- Budget at least $5,000 for one-time hiring expenses
- Research small business medical coverage options in advance
- Build three months of payroll in cash reserves first
- Plan for 7-10% annual increases in premiums and other expenses
This financial roadmap demystifies the “impossible” expense and makes it feel possible instead. The transformation from a solo operation to employer is a challenging process. But with the right financial planning it becomes the solid foundation for sustainable business growth.
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