Construction is a risky business, highly competitive, and seasonal. Budgeting is crucial, but construction company owners delegating the management of their accounts and payroll to a bookkeeper may not know how much their employees are really costing them.
Business Insider reports that 70% of small businesses, those employing up to 100 employees and having assets of 10 million dollars or less, fail within a ten-year period, mostly due to cash flow issues. Construction companies are especially vulnerable. Payroll is often the largest recurring expense a company faces. The labor burden, or true cost of each employee, is important to know when creating a workable budget necessary for any company’s success.
Salaries are predictable, but wages paid to hourly workers and independent contractors will differ from pay period to pay period. Planning for payroll fluctuations requires determining the hidden costs associated with employees. These costs can make or break a business. Do you know how many employees you can afford to pay?
Common hidden costs associated with employees.
Your employees’ hourly wages and salaries are the most obvious expenses, but don’t forget to factor in the federal payroll taxes you are required by law to pay, as well as any state required withholding and unemployment taxes.
Social Security and Medicare, filed quarterly on IRS form 941, are currently taxed at 6.2% and 1.45% of employee wages respectively and are matched by the employer. The employer’s share of the tax gets deposited bi-weekly, monthly or quarterly through the Electronic Federal Tax Payment System, EFTPS.
The Employer’s Federal Unemployment Tax or FUTA rate is 6.0% for 2017 and is deposited quarterly using EFTPS. It applies to the first $7000.00 each employee is paid. FUTA taxes are filed annually on IRS form 940.
Computerized payroll services update changes to payroll tax rates automatically. Be sure to check these rates when deciding how many employees you can afford to pay. The IRS offers other helpful accounting tips for construction companies here.
Incentives and Insurance Plans
Happy employees will go the extra mile to get the job done right. Incentives like annual bonuses and merit raises are important for employee retention and are part of the overall cost of your payroll.
If you have 50 or more full-time employees, you must offer a company insurance plan. Be aware that the employer generally splits the cost of coverage with each employee. Shop around to get the best deal for your size and type of business.
Don’t forget the cost of your Worker’s Compensation policy, based on your total annual payroll for each employee. It will vary by state.
The Company Credit Card
A mobile workforce on the job site often means reimbursing your crew for expenses such as fuel, meals, and equipment. Company credit cards are a convenient way to do this, as long as you pay attention to the charges listed for each cardholder on your monthly statement. Make sure all purchases are job-related and necessary.
Employees receiving paid vacation time and sick leave, receive wages for hours they are not actually working. If other employees must cover for them, any overtime paid to them will raise the cost of your payroll. Also be aware of how often you keep your employees late. Those extra hours can add up quickly.
Calculating the cost of labor.
Take the time to calculate the labor burden for your company. Find the hourly rate of pay for each employee, multiply it by the number of hours worked during a 52 week pay period, excluding days off and unpaid vacations. Add the employer percentage of payroll taxes, and insurance premiums. Include estimated overtime, bonuses, raises and any expenses incurred by each employee. Knowing exactly how much your employees cost you will help you budget for the year, make informed hiring decisions, and better manage your payroll to ensure better cash flow and greater profitability.