Hidden Employee Costs with New Hires: Part 1

Most industry analysts believe that the cannabis industry will experience massive growth over the next 18 to 24 months. The Vangst 2024 Salary Guide reports that 86% of cannabis companies plan to hire additional staff this year, and with pending cannabis reclassification the industry’s future is optimistic. Unfortunately, many companies overlook the hidden costs of adding additional staff to their team and are caught off-guard by its impact on their bottom line.

To help companies budget for growth, we’ve broken the hidden cost down into 3 main areas - Taxes & Insurance, Labor- Management, and Tech Stack.

Taxes & Insurance

How much an employer pays an employee is not limited to their salary or hourly wage. The employer’s portion of their employee’s wage is an expensive and often overlooked cost that employees must include in their budgets. The following is a breakdown of each of these expenses.

Taxes

The Federal Unemployment Tax Act (FUTA) is a federal law that requires employers to pay an extra tax alongside existing federal income and payroll taxes. FUTA taxes are solely the responsibility of employers, relieving individual taxpayers from this obligation. Revenue collected from FUTA supports state unemployment insurance agencies, which provide benefits to unemployed individuals. Employers are responsible for 6% of the first $7,000 of employee wages ($420/employee). The $7,000 is often referred to as the federal or FUTA wage base and each state's wage base may be different based on the applicable state's rules.

The State Unemployment Tax Act (SUTA) is a payroll tax that goes towards supporting temporary state unemployment benefits to workers who have lost their jobs.

Although commonly known as SUTA tax, its name may vary by state, such as State Unemployment Insurance (SUI), Reemployment Tax, or Employment Security Tax. In most states, employers are the only ones responsible for paying SUTA tax. It’s important to note that if the State requires employers to pay their employee’s State Unemployment Insurance they can receive a credit on their FUTA tax return.

Each state’s SUTA wage base is the amount of employee earnings that are subject to SUTA tax. The same wage base applies to all employees in the state. Because this amount is a maximum, it’s also referred to as a wage limit.

The Federal Insurance Contributions Act (FICA) of 1935 established a payroll tax on earnings of American workers and called for matching contributions from employers. The funds generated from this tax go towards financing the nation's Social Security program and Medicare program.

The Social Security Tax is a percentage of gross wages that the majority of employees, employers, and self-employed individuals are required to contribute toward the federal program. Employers are responsible for deducting the appropriate Social Security tax amount from each paycheck and remitting it to the federal government within a certain amount of time. Non-compliance with these obligations can lead to substantial penalties. Social Security is withdrawn automatically from each employee's paycheck. The Federal Insurance Contributions Act (FICA) requires that both employers and employees each pay 6.2% of earned income toward Social Security.

Medicare Tax is a federal employment tax designated to support a portion of the Medicare insurance program. Similar to the Social Security tax, Medicare tax is automatically deducted from an employee's paycheck or paid as self-employment tax. It is also known as the "hospital insurance tax." The tax contributes to Part A of the Medicare program, which provides hospital insurance for individuals aged 65 or older and those with certain disabilities or medical conditions. Part A coverage includes hospital visits, hospice care, nursing home services, and certain home healthcare expenses. In 2024, the Medicare tax rate stands at 1.45% for both employees and employers, totaling 2.9%.

Insurance

Workers’ compensation insurance is required to be carried by businesses in every state (except Texas and South Dakota). This insurance is in place to cover medical bills, rehabilitation costs, various legal costs, and lost wages for employees injured on the job or suffering from a work-related illness. Each state has its own regulations and the price for workers comp can vary depending on the location of the job, the industry, and payroll.

In Conclusion…

In addition to an employee’s wages, employers are required to pay an additional, up to 12% of the employee’s wages in Tax and Insurance. It's important to consider all the additional expenses beyond their salaries.

If you’re interested in learning how Vangst helps cannabis companies minimize these hidden fees, feel free to contact us here.