Employee Benefits

The True Cost of Providing Employee Benefits

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Published On: April 26, 2021

When hiring a new employee, it’s essential to think beyond the cost of their base salary. In a modern workforce, where millennials occupy the largest chunk of the U.S. labor force, the businesses that offer the best benefits packages often boast the happiest, most skilled, and dedicated employees on their payroll.  

Firstly, the cost of employee benefits depends on what a company is legally required to offer and what it chooses to add on as extra incentives. Businesses pay most of the premiums or contributions in cost-share, meaning that benefits packages can represent an expensive aspect of the entire business operation. Let’s take a closer look.  

Mandated Benefits vs. Voluntary Benefits 

State and federal laws can influence your business in a big way. The specifics of a company (such as whether or not any employees are part-time, which state they’re located in, or how many employees they have on staff) determine what benefits companies are legally required to provide. For companies with full-time workers, there are five essential taxes and mandated benefits they must offer. 

  • FICA Contributions:  The Federal Insurance Contributions Act (FICA) is a federal payroll tax used to fund Social Security and Medicare programs that provide benefits for retirees, those with disabilities and children. Employees are required to withhold Social Security taxes and Medicare taxes at 6.2% and 1.45% respectively, with employers matching these amounts. 
  • Unemployment Insurance:  Companies are required to contribute a certain amount toward unemployment insurance depending on the state they are located in. The law forbids businesses to deduct any part of this contribution from an employee’s pay. If an employee finds themselves unemployed through no fault of their own and that worker meets the basic requirements, they can collect unemployment due to these contributions. 
  • Worker’s Compensation Insurance:  Worker’s compensation assists employees who have been injured while on the job, often covering medical bills and lost wages in exchange for the employee’s right to sue. Like unemployment insurance, employers are not allowed to deduct this contribution from an employee’s pay. 
  • Health Insurance:  Health insurance coverage is only mandated if a company is large enough; businesses with 50 or more full-time employees risk a potential assessment and subsequent costly fines if they do not offer adequate and affordable healthcare coverage to their full-time employees and dependents. 
  • Family and Medical Leave:  Like health insurance coverage, family and medical leave are only legally required in private firms with 50 or more employees. Workers are eligible for up to 12 weeks of unpaid leave during a 12-month period during which their job is guaranteed. Qualifying family and medical events include a severe illness or health condition affecting yourself or a family member, pregnancy and its associated concerns (such as doctor’s appointments, incapacitation due to morning sickness, and medically required bed rest) and military family leave circumstances.  

Some benefits may seem more familiar than others, but the truth is that both employers and employees put money into the cost of benefits. When it comes to health insurance, companies are responsible for paying a large percentage of the contribution while employees pay the remaining amount, usually through a pretax payroll deduction.  

    Voluntary benefits also play a critical role in the recruitment process because they are extremely valuable and often essential to potential employees.

    The voluntary benefits most employees recognize and seek out include:  

  • 401(K) retirement savings plans, especially with matching percentages 

  • Dental or vision insurance 

  • Life insurance 

  • Paid vacations, sick days or holidays 

  • Company cars 

  • Education assistance 

  • Child care assistance 

  • Tuition reimbursement 

  • Hospital indemnity 

  • Critical illness 

  • Accident 

Voluntary benefits can be extended at little to no cost to the employer. However, suppose a company is only offering employees the bare minimum. In that case, it will be easier for competitors to swoop in and attract their top talent by extending a more enticing benefits plan. 

Calculating the Costs of Employee Benefits 

Suppose your company is weighing the costs of adding a new employee to the team. In that case, the costs of that potential employee’s benefits must be considered long before an offer is ever extended. Providing benefits that meet basic employee needs and meet compliance regulations adds between 30% and 40% to the base pay for most employees. To get a closer estimate, check out the United States Bureau of Statistics for a more precise figure. 

The Takeaway 

Do companies pay for benefits? Yes! While employees may have to contribute to federally mandated benefits and a portion of their health insurance, the employer’s costs are often much higher. After all, benefits are designed to do just that: Benefit the employee. They can function as both a perk of joining the company and a reward for sticking with it; although the cost of employee benefits can add up, they are well worth the price of attracting and retaining your industry’s top talent.  

How do your employee benefits stack up? Compare your benefits package offerings now with our Mployer Advisor Insights 2022 Benefits Report.  Looking for more exclusive content? Check out what’s trending on the Mployer Advisor blog, and be sure to catch the latest episode of This Week in Benefits.

Employee Benefits



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Brian Freeman

Founder and CEO, Mployer Advisor


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