How do I know if I can afford an employee?

Welcome back! Last week we talked about figuring out when you have an employee vs. an independent contractor. This week we’re talking about when you will know if you can afford to hire an employee.

But first, I need to be transparent and let you know that some links are affiliate links which means if you buy, I may receive a small commission from the sale. This does not cost you anything.

knowing when it’s time to hire

If you can’t fund a separate bank account, you can’t afford to hire anyone.

You may have heard this before, but if you’re feeling like you need to hire someone to help out, you probably should have done it already. Hopefully you are finding this article before you get to that point, because there are some steps you will want to take beforehand to make sure you can afford that employee. When you start a business, you should have a vision of where you’d like to end up. And if your vision includes other people working in the business so you can work on the business or spend more time with your family, then you want to prepare for that.

  1. Open a new bank account. Starting the moment you decide you need to have an employee (or contractor) working for you, you should be setting aside money and putting it in the separate bank account to fund payroll. It’s best to set this up as a checking account, because later on you will be paying payroll directly from this account. If you can’t fund that account, you can’t afford to hire anyone. And I would not recommend cutting your own salary to fund this payroll account. It is your business and you did the work to build it, you took the risk. Even if the employee is going to take over managing the business, you should still be paid the most.

  2. Figure out how much you want to pay them. Are you going to offer a competitive wage or salary for your area? (I hope the answer is yes.) Figure out what the market wage is for the job they will be doing, and increase it a bit, so you can attract good talent. You don’t necessarily have to start them out at higher than market, but you want to be able to afford to give them a raise quickly if they are performing well. Also consider offering benefits such as healthcare and retirement.

  3. Figure out how much you will owe in payroll taxes, on top of what you pay the employee. Say what? Yes, don’t forget about the employer portion of payroll taxes: Social Security, Medicare, and Unemployment Tax. your state may also require Unemployment Tax, Worker’s Comp, and Disability Insurance that you have to pay. Here we partner with Gusto to provide payroll services to our clients, and they have a really handy Employer Tax Calculator to help you with this!

  4. Start saving three month’s worth of payroll. Using this calculator, enter in the monthly salary you intend to pay your employee, and multiply that total by 3. Heaven forbid you have a couple slow months or some sort of disaster, you still need to be able to pay your employee(s). You always want to have at least 3 month’s worth of payroll in the bank, plus enough to cover operating expenses. But building this up from the get go will ensure that you are covered for a rainy day in the future, AND give you the peace of mind that you can actually afford this employee.

You always want to have at least 3 month’s worth of payroll in the bank

If you follow these four steps before hiring an employee you will be in a good place financially, so you can just focus on finding the talent you need, hiring the right person for the job, and getting them up to speed with out worrying about the money.

As always, we are here to help you with the numbers so you can focus on moving your business forward. We set you up with easy to use tools and automation and guide you so you can see your finances more clearly in real time anywhere--and understand what it all means. If you’re ready to hire, or think you are getting close, let’s talk.