Employee Benefits for a Small Business: What to Offer and What It Costs

Required benefits versus optional ones

Some benefits are legally required, such as payroll taxes, workers' compensation insurance in most states and unemployment insurance. Most other benefits are optional.

Before you design a package, cover what the law already demands. Requirements depend on your state and your headcount, so confirm details with your state labor department or accountant.

• Employer payroll taxes for Social Security and Medicare, plus federal and state unemployment taxes.
• Workers' compensation insurance in nearly every state once you have employees.
• Leave required by law, such as jury duty or military leave, and in some states paid sick leave.
• Health coverage for employers that reach the size where the Affordable Care Act employer mandate applies.

Everything beyond that, including retirement matching, dental, vision and extra time off, is a choice. For payroll basics see how to do payroll.

Health insurance options for small employers

Small employers can buy group health plans, offer an individual coverage reimbursement arrangement, or help employees choose marketplace coverage. Each has different costs and tax treatment.

Health coverage is usually the largest benefit cost. The common routes are:

1. Group plan. You pick a plan and split the premium with employees. Learn the differences in HMO, PPO and POS plans.
2. Reimbursement arrangement. You give employees a set monthly amount to buy their own plan. This caps your cost.
3. Marketplace help. You point employees to the public exchange. It costs less but offers less control over the package.

A licensed benefits advisor can quote plans and explain how they differ; ask how the advisor is paid. Ask your accountant about tax credits for small employers and check current eligibility rules, because they change.

Retirement plans without a big budget

A SIMPLE IRA, SEP IRA or a small-business 401(k) lets you offer retirement saving at modest cost. Employer contributions are optional in some plans and required in others.

You do not need a large company to offer a retirement plan. Providers now offer low-fee 401(k) plans for small teams, and simpler IRA-based plans are available through banks and investment firms.

• SIMPLE IRA. Low administration, with required employer contributions.
• SEP IRA. Employer-funded only, with flexible yearly contributions.
• 401(k). More features and flexibility, with more administration. Read how employer 401(k) contributions work.

Contribution limits and tax credits change often. Ask a retirement plan provider or your accountant for current figures instead of relying on an old number.

Time off and flexibility cost less than you think

Paid time off, holidays and flexible schedules are among the most valued benefits and often cost less than insurance.

For many workers, a predictable schedule and paid days off matter as much as insurance. A small business can often offer these with careful planning. Our guide on how PTO works covers accrual versus lump-sum approaches and payout rules.

Options that cost little in cash:

• A set number of paid holidays and a PTO bank.
• Flexible start times or a day of remote work where the job allows.
• Paid time off for volunteering or personal days.
• A birthday or tenure day off.

Track accrued time off as a liability, since you owe it when staff use it or leave in some states.

Part-time workers and contractors

Benefit eligibility for part-time staff depends on your plan rules and the law. Independent contractors are not employees and do not receive employee benefits.

Set written eligibility rules, for example the number of hours worked per week to qualify for health coverage. Federal and state rules may require some coverage or leave for part-time staff past a certain number of hours, so check before you finalize the policy. See part-time employee benefits for the common choices.

Do not label a worker a contractor to avoid benefits. Classification depends on the real working relationship, and misclassification can lead to back taxes and penalties. Ask an accountant or employment attorney if you are unsure.

Pricing your package: a worked example

Add benefit costs to wages to find your real cost per employee. A common planning step is to price the full package before you advertise a job.

Here is an illustrative example for one employee earning $50,000 per year:

Your numbers will differ. The point is to budget the total, not just the wage. Compare with how much benefits cost per employee to sanity-check your plan.

Funding growth when payroll rises

Adding staff and benefits raises fixed costs before new revenue shows up. Match the funding to how quickly the new hire pays for themselves.

If a new hire lets you take on $15,000 a month of added work at a healthy margin, the extra payroll can pay for itself within a few months. If the revenue is uncertain, move slowly.

When you need working capital to cover the gap between hiring and getting paid, ROI Funder places working capital and lines of credit for businesses with 500+ FICO, 6+ months in business and $20,000+ monthly revenue. Money can arrive the same business day on approved, complete files. We show the true cost and payback before you sign. Use the funding affordability guide to size it.