There’s an awful lot of talk lately about how high unemployment is in the U.S.
One article on the Huffington Post recognized that if half of small business owners hired one person, unemployment in the US would be a scant 1%.
That’s probably true. It’s encouraging to ponder. Let’s see how realistic it is.
That article tells us:
- Small businesses are very important to the US economy, in case our policy makers missed it (so let’s not overburden them, please).
- Small businesses are responsible for 80% of new job creation in the U.S.
- It’s not the big banks or multinational corporations, but the mom and pop businesses that drive new job creation today.
So what does it cost to hire one, full time, employee?
Here’s what we’ve discovered:
Assumptions
- The employee is hired full time.
- Salary is minimum wage, which right now, is $7.25 per hour in New York.
- Employee works 40 hours per week, 50 weeks per year.
- The small business is required to purchase universal healthcare (unlike McDonalds that gets to avoid those additional expenses)
- The business is required to pay unemployment insurance, payroll taxes (yes, that’s taxes on an expense!), social security, vacation benefits, sick leave, personal days, and disability insurance.
Given the assumptions above, the total annual salary cost will be: $11,600.
- Add a 10% premium for vacation benefits, sick leave, personal days costs: $12,760.
- Add a 20% premium for payroll taxes and unemployment insurance expenses: $14,036.
- Add a 30% premium for new healthcare expenses (the true cost of universal healthcare who can’t “opt-out”): $18,247.
- Add a 10% premium for disability insurance : $20,072.
What does this all mean? The employee sees $11,600 in salary. But the out-of- pocket cost to this small business is $20,072 or almost double what the salary is.
These are unavoidable costs. These costs are dictated to the small business owner. He has to pay them or face prosecution or worse.
What does the business need to generate in additional revenues to pay for all this?
In a healthy business, the cost of employees is 20% of revenues.This means the business needs to generate at least five times the total cost of an employee to be able to afford that additional, fully loaded cost of $20K for a new, minimum wage employee.
To hire one, full time employee at minimum wage, the business needs to generate at least an additional $100,000 in annual revenues to pay for this employee.
What if the business owner, who is taking all the risk and staying up nights to keep the business open wants to pay himself minimum wage? That means the business has to make yet an additional $100,000 in annual revenues just to pay the owner minimum wage!
All in, the business needs to generate on average, $200,000 in annual revenues to afford to pay the owner and one full time employee minimum wage. That’s a pretty tall order in the middle of a recession.
If you want to pay a “living wage”, just multiply the revenue needs.
Let’s say you want to pay an employee the average salary Americans are earning these days, which is $43,000 per year.
That means the true cost of that new employee is really $86,000 per year.
The business needs to generate an ADDITIONAL $450,000 in revenues to afford to pay that new employee an average salary given all the added expenses.
The thousands of small businesses I know are struggling to make $30,000 in annual revenues. A half million dollars in revenues is a pipe dream.
Few are getting rich running small businesses.
If you want to know why businesses aren’t hiring, run the numbers.
They’ll answer the question.
If you want to know how to drive revenues much higher, watch our Instant CFO Course. We’ve helped small businesses double, triple revenues without spending anything on marketing. We can show you how too.
It’s all about increasing revenues these days. We’ve shown thousands how to do it.
In your corner as always,
Dawn Fotopulos
