Over the course of our lives we are faced with seemingly an endless number of significant and potentially life altering decisions. Many of these decisions have a direct or indirect financial consequence on our lives. One of the largest decisions one can make is whether or not to transition from employee to employer. While it may sound exciting to be the “Boss”, pursuing the path of an entrepreneur is a decision that should be taken with great caution and planning, because it is certainly not for everyone. So what are some prominent concerns that should be considered?
Employee’s and the Tax Burden
Most people who have only signed the back of the paycheck their entire working lives may not truly appreciate the full cost of an employee. As an example, weekly or perhaps bi-weekly, you get your paycheck. You may have taken note that on top of your federal and/or state income taxes due, you are also responsible for payroll taxes. This is what funds programs like Medicare and Social Security. Yet many employees don’t realize that each dollar you pay towards these programs must be matched by your employer, which will now be your responsibility. That’s about 7.65% of each employee’s compensation. If you plan to draw a salary, which you will eventually do if your business produces a positive cash flow, that number will be the full 15.3% on your income. As the employer, in many cases doing the same type of work you once did as an employee, your payroll tax liability just doubled.
If you decide you are going to hire someone to help meet the demands of your customers, you must match their payroll tax liability as well. While you may have offered someone a specific salary or hourly wage, you must then factor in the cost to fund ½ of their Social Security and Medicare contributions.