Understanding Your Cleaning Company's Employee Labor Costs

A question that is presented to us by cleaning business owners on a regular basis is “how much do I add to my cleaners wages when figuring my total employee costs?”  In order to answer that question, you need a better understanding of your total employee labor costs.

When you start hiring employees, you will have expenses over and above the wages you pay them. Understanding your company's employee expenses can be a daunting task. There is Federal and State employment taxes, unemployment taxes, and Workers' Compensation that all comes into play when putting a proposal together. The better understanding you have of these expenses, the more accurate a price you can provide the prospect and the less chance of over or under estimating your price.

Knowing your numbers will help you to accurately estimate what percentage of employee expenses you should be deducting from your proposal price. Your employee expenses will include FICA and Medicare, FUTA, SUTA, your company's workers compensation rate, and even liability insurance, which is based on payroll costs.

Generally, these expenses run anywhere from 15 – 25% of employee wages. If you employ full-time employees you should also include such benefits as health coverage, vacation, and retirement compensation, which will add to your total employee expenses.

Let's break down your employee payroll expenses:

NOTE: Numbers used here are current as of this writing. Check with the IRS or your accountant for the most up to date rates.

FICA and Medicare:

Social security and Medicare taxes, also known as FICA taxes must be withheld from your employees' wages. Unless you have employees making over $100K per year, the combined FICA Taxes (Social Security and Medicare) are 7.65% (U.S.) of payroll.

Social Security tax makes up one half of FICA (Federal Insurance Contributions Act). The tax rate for Social Security is 6.2% of each employee's salary, with the employer paying a matching amount. Both the employer and employee have a ceiling on how much they are responsible for paying. Medicare Tax is the other portion of FICA. Employers must withhold 1.45% of each employee's salary for the Medicare tax. In addition, employers must pay a matching amount.

Unemployment Tax:

Employers are required to pay unemployment tax for each employee that works for the company. This tax is called FUTA and SUTA (Federal and State Unemployment Taxes).

The FUTA rate is 6.2 %, but you can take a credit of up to 5.4% for SUTA taxes that you pay. If you are eligible for the maximum credit your FUTA rate will be 0.8% . The wage base for FUTA is $7,000. You will stop paying FUTA for each employee once their wages exceed $7,000 for the year. You will need to check with your state about SUTA tax rates and the wage base. Generally, your SUTA tax rate is based on the amount of unemployment claims that are filed by employees that you have terminated. When your business is new, your SUTA tax rate starts at the maximum and declines if you build a history of few claims.

Examples of SUTA rates by state would be: CA (3.4%) per $7000, NY (3.4%) per $8500, and Texas (2.7%) per $9000.

For information on Federal payroll tax requirements, check out IRS publication 15, Circular E. OR Federal Unemployment Tax

State law determines individual state unemployment insurance tax rates. For a table of current tax rates and taxable wage base information for individual states, click here: http://www.unemploymentinsurance.doleta.gov/unemploy/statelaws.asp

You can learn more about your unemployment tax obligations here: http://workforcesecurity.doleta.gov/unemploy/uitaxtopic.asp

City and County Income Tax:

There are not many cities or counties with an income tax. There are some, however, such as New York City that has this type of tax. I highly recommend that you check with your local government to see if there is an applicable city or county tax obligation.

Liability Insurance:

Liability insurance is designed to protect companies when they are at fault for an accident or loss. This insurance cost should be figured in as part of your total employee costs. Liability insurance is usually a percentage per $1000 of payroll. Some insurance companies may do it differently but most will base it on payroll.

Worker's Compensation:

Worker's compensation insurance is based on classification codes that label employees in different industries into numerical groups. Premium rates are then set by insurance companies for each group number. All of your employees will be categorized into one of these codes. Most states will use the NCCI standardized classification code system but a few states such as New York and California use their own system.

Worker's compensation insurance covers claims by employees against a company for job related injuries or illness. With the exception of Texas, every state will require that you buy worker's compensation insurance. Be sure to check the laws for your state.

Worker's compensation is priced as a percentage of payroll. The average percentage in the United States is just under 2%. However, due to the nature of the cleaning industry, this percentage is generally much higher, depending on the state and the type of work employees are engaged in. The base rate is by employee classification and set on a state level.

The rates can vary greatly by state. California, for example, requires mandatory $1 million dollar limits for all workers comp policies in the state. They are the only state that requires this limit as most states only require coverage limits of $100,000 - $500,000. I've seen rates for cleaning companies as high as 23% in California.

Let's say you classify your cleaners under janitorial service by contractor and your rate is 9.39% and you pay your cleaner $300 per week. Your worker's compensation costs for that employee would be $28.17 per week.

Example of applying employee payroll/labor expenses:

Cleaners Hourly Wage: $10.00
FICA and Medicare: 7.65% $0.77
State Unemployment Tax: 1.50% $0.15 (only on first $10.800)
Federal Unemployment Tax: 0.80% $0.08 (only on first $7,000)
Liability Insurance: (1.0%) 0.10
Workers' Compensation 9.39% $0.94

Total employee costs above hourly wage: $2.04

TOTAL $12.04  

This example shows that 20.4% of the cleaner's hourly wage should be applied to the total hourly cost of your employee when bidding a job.

Other Possible Employee Expenses (usually applies to full-time only)
Medical benefits and insurance
Paid holidays
Paid vacation days
401K or retirement options

Conclusion

Labor expenses can be one of the most difficult expenses to determine when estimating the price for a job. No two companies are exactly alike and therefore you must know exactly what YOUR field labor costs are for your company. A minor miscalculation can cost you plenty. For example, if you have 8 employees that clean for you on an average of 30 hours per week, that comes to 12,480 labor hours per year. If you fail to account for just $1 dollar per employee per hour, your miscalculation can cost your significantly and undermine your true profit margin. Do your due diligence and make sure your numbers are correct when analyzing those “hidden costs” of doing business.

For more on understanding small business employment taxes, visit the IRS site here:

Small Business & Self Employed Taxes

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