When budgeting for a new hire, the biggest mistake is underestimating how much the new employee will cost the company. Often, only the salary and some of the payroll taxes are thought about versus the entire cost of the position.

Once an employee officially joins your company, there are layers of additional expenses that immediately begin attaching themselves to that role. You now have payroll taxes, workers compensation, liability insurance, onboarding costs, software access, training time, education, certifications, mentorship, equipment, uniforms, benefits, retirement contributions, supplies, and sometimes even company vehicles or mileage reimbursement.

Most business owners dramatically underestimate how quickly all of those expenses add up. Then, when you add a profit margin on top of all that, it becomes easier to understand why cash flow can take such a huge and unexpected hit when growing a team.

What makes this even harder is that many of the largest costs tied to employees are not always obvious upfront. Training alone costs far more than most business owners realize because while the employee is learning, another team member is usually slowing down their own productivity to teach and support them. Leadership spends additional time mentoring, correcting, reviewing work, answering questions, and helping the employee acclimate emotionally and professionally inside the company. That time has value too.

This is why I think hiring can feel so emotionally overwhelming for business owners once payroll starts. Many people think they prepared financially because they planned for the salary, but then the hidden operational costs begin stacking up behind the scenes and cash flow suddenly feels tighter than expected. That is also why I personally build in a large financial cushion whenever I prepare to hire.

As a general rule, I immediately add an additional 50% on top of the employee’s salary just to help cover miscellaneous payroll expenses, taxes, and operational costs tied to having an employee. Then I look at the overall cost of benefits, workers compensation, insurance, retirement contributions, and other company overhead connected to staffing and build in another layer of financial cushion there too.

A lot of times, the true cost of an employee can end up being close to double their actual salary by the time everything is fully accounted for.

That does not mean hiring is a bad investment or that you should avoid hiring until you are in an emergency situation. But I do think business owners deserve a more realistic understanding of what team growth actually costs financially so they can prepare appropriately instead of accidentally creating negative cash flow while trying to scale.

Because when hiring is underprepared, employees start feeling stressful instead of supportive, and it becomes very easy to revert back to, “I’ll just do it myself.”

A Simple Hiring Formula I Use

Employee Salary
+
50% Cushion for Payroll Taxes, Expenses Directly Tied to the Position, & Training
+
Benefits, Insurance, Workers Comp & Retirement Costs
=
Estimated True Cost of Hiring

With Numbers:

$65,000 Employee Salary
+
$32,500 (50% Cushion)
+
$25,000 (Benefits, Workers Comp, etc.)
=
$122,500 Total Compensation

This formula is not perfect for every business or every industry, but it creates a much healthier starting point than looking at salary alone. You can clearly see how the company portion of payroll and hidden operational costs can make the total cost of an employee almost double their salary.

Final Thoughts from Your Favorite Accountant 🧡

Before making your next hire, sit down and calculate the true operational cost of the position, not just the paycheck attached to it. Building margin into your hiring decisions creates healthier cash flow, healthier leadership, and healthier company culture long term.

I also recommend putting all positions and salaries onto your organizational chart so you can begin forecasting future payroll growth before hiring becomes an emergency.

Because at the end of the day, positive cash flow isn’t luck, it’s strategy. And it’s my goal to make that strategy as simple as possible for you.

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