Accounting, Bookkeeping, Finance, HR, and Tax for Startups.

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Video Transcript:

Hey it's Scott Orn at Kruze Consulting. And today I'm answering the question, how do you calculate the true cost of a startup employee?

The reason why we're getting this question quite a bit is two things: First, a lot of companies are really scrutinizing their operational expenses. We're in the middle of COVID, and the economic damage from it. And so startups are taking a hard look at what their expenses are. They should be doing that.

And so, a lot of them are asking us, hey how do I calculate what my employees really cost? Now, the second reason people are asking this question, is many of these companies are looking to be opportunistic. There are a lot of great people hitting the market that are available, that were never available. And so, what they're trying to do is maximize or level their team up. So they're trying to make sure they can afford, and figure out how many of these people they can afford. So that's why they need to know this.

So, the first thing you start off with is salary. It's kind of basic, right? Whatever the salary is, that's the biggest ingredient in the entire calculation.

Now, the second thing is, employment taxes. Now that can range, but usually we kind of put in like 10% or so for just taxes. Social Security is like 6%, you have some other state taxes and municipal taxes, so I just put 10 to 12% in there, just to be safe.

Now benefits. Benefits, depending on the type of employee you're hiring, if you're employing someone with a family, and who's married and has a bunch of dependents, that's gonna be pretty expensive. That's gonna cost somewhere between 1,000 to two, $3,000 for that family. Now if it's just kind of a 23-year old engineer, super healthy, that might be more like a four or $500 expense. So, it depends.

But you should just take averages there. You shouldn't kind of pinpoint exactly the kind of person 'cause you don't wanna have bias or select the wrong kind of person, or have hiring bias. Now, the next thing you wanna include is perks like lunches, continuing education, things like that. In the tough economic times we're living in right now with COVID, people are definitely cutting down on the perks. People are still doing continuing education, 'cause that's super valuable for the company, has a great ROI. But include that in the calculation.

You'll also wanna include one-time onboarding costs, like buying a computer, two or 3,000 bucks, all the time it takes to set up web services, all the security checks, background checks, all that stuff. Now if you use a platform like Rippling or Justworks, Gusto, TriNet, those all help you automate the process. The best at automating really is Rippling, 'cause they're able to set up connections to all your web services automatically. Microsoft Azure is pretty good at that kind of stuff too.

But, factor in all those expenses, 'cause they can really add up. It's good $3,000, $4,000 just to be conservative. You also may wanna allocate some of their continuing web service expenditures. Things like, everyone needs a Google app, so that's 15 bucks a month. Everyone needs their security backup, their malware stuff, Dropbox, Box, Google Apps, all those things really add up. So just kind of ballpark that. It might be three or $400 a month for the web services they use.

Also, sometimes folks wanna allocate a portion of your rent. Now this is super applicable if you're in a WeWork, and you're having to upgrade your office just because you add a new person. Typically, if you're in a big office you have plenty of space, we don't see this allocation. But it is helpful from a financial modeling perspective. But I wouldn't make the decision too heavily dependent on what the rent is, factored in. But it's nice to capture that in there.

So again, to just recap, look at their salary, look at their benefits, add in some for taxes. Don't forget the one-time onboarding costs, like buying a computer. Don't forget their ongoing monthly web services spend, perks, lunches, things like that. And some people do like to add in rent allocations.

Now I hope that helps you figure out the true cost of a startup employee. And if you're one of those folks who's leveling up your team, good for you. Best of luck. And I hope you find some amazing people on the market. Thanks. Cool.

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