The Federal Unemployment Tax Act (FUTA) sets your unemployment tax rate per employee at 6 percent, but if you qualify, you can claim a 5.4 percent credit. It’s always a best practice to check with your accountant when it comes to calculating payroll taxes (or anything to do with numbers), but you can get a pretty accurate estimate by following these steps. One wrong step and – boom! you’re in trouble with the IRS. State taxes aside, navigating federal payroll taxes can feel a bit like navigating a minefield. On top of that, there are unemployment taxes, which vary by state but can include state income taxes and unemployment insurance. In this example, the total hourly cost of that employee is closer to $20 per hour.Īs a business owner, you’re required to pay taxes for the Federal Insurance Contributions Act (FICA), which covers Social Security and Medicare, and the Federal Unemployment Tax Act (FUTA), which funds workforce agencies. Now, divide $39,200 by the number of hours the employee will actually work in a year (about 1,960) to calculate the true hourly rate of that employee. But let’s say an employer spends an additional $8,000 on that employee throughout the year. ![]() In this case, the employee’s annual labor cost is $31,200. Once the total overhead is added together, divide it by the number of employees, and add that figure to the employee’s annual labor cost. This includes building costs, property taxes, utilities, payroll taxes, benefits, insurance, supplies, and equipment costs. Sticking with that $31,200, we can now use the labor cost formula to determine the amount of annual overhead costs an employer pays in addition to that employee’s hourly wage. But if that employee is absent from work for 15 days that year (taking paid time off), they will actually work closer to 1,960 hours per year - making their actual hourly rate closer to $16. ![]() If they work 40 hours per week for 52 weeks, they will work 2,080 hours, which makes their labor cost $31,200 (pre-tax) per year. Here’s a labor cost example: Let’s say an employee is paid $15 per hour. ![]() It is important to have a consistent employee timesheet software or app for long term labor cost success. This will help determine how much an employee costs their employer per hour. Calculate an employee’s labor cost per hour by adding their gross wages to the total cost of related expenses (including annual payroll taxes and annual overhead), then dividing by the number of hours the employee works each year.
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