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A Small Business Guide to the Costs of Employee Benefits

Understanding the cost of employee benefits for a small business is crucial in today’s labor market where benefits can significantly influence employee satisfaction and retention. For small business owners, creating a cost-effective benefits package is not only a means of attracting and retaining talent but also an investment in the productivity and long-term health of the company.

Employee benefits encompass more than just health insurance; they include retirement plans, disability insurance, wellness programs, and more. While these can be financial burdens, they are also vital tools for fostering a supportive work environment and enhancing employee morale. A well-thought-out benefits strategy can be a decisive factor in a business’s ability to compete with larger corporations for skilled workers.

Benefits: A Double-Edged Sword

While offering comprehensive benefits can help attract top talent, the costs associated can be considerable. Small businesses must navigate these waters carefully, balancing the desire to provide competitive benefits with the reality of tighter budgets and resource constraints.

Detailed infographic on average costs and types of employee benefits typically offered by small businesses, highlighting health insurance, retirement plans, and paid time off - cost of employee benefits for a small business infographic comparison-2-items-casual

In the following sections, we will delve deeper into how small businesses can budget for and manage these costs effectively, ensuring that they can offer enticing benefits packages without compromising their financial health.

Budgeting for Employee Benefits

When it comes to cost of employee benefits for a small business, planning is crucial. Here are some straightforward strategies to help you budget wisely while staying competitive in your industry.

Budget Recommendations

Start with the basics. First, cover all legally required benefits such as workers’ compensation, unemployment insurance, and, if applicable, disability insurance. These are non-negotiable and must be factored into your initial budget.

Know your numbers. Understanding the average cost of employee benefits is essential. As per BLS data, the average hourly cost paid by business owners for employee benefits can vary significantly across different sectors. For instance, in December 2022, the costs were around $13.17 per hour for civilian workers and $11.86 for private industry workers. This translates to an average annual cost of approximately $23,969.40 for civilian workers and $21,585.20 for private industry workers.

Salary Multiplier

A practical approach to budgeting for benefits is using the salary multiplier method. Generally, benefits cost about a third of the salary. This means, for every $30 spent on an employee, about $10 should be allocated for benefits. This ratio helps in creating a balanced approach to both salary and benefits, ensuring neither is disproportionately high.

Industry Competitiveness

Stay competitive. To attract and retain top talent, small businesses need to offer benefits that are competitive within their industry. This doesn’t mean matching every benefit offered by larger corporations but focusing on what is most valued by your employees. For instance, flexible working hours and remote work options are highly valued and can be more cost-effective than other more traditional benefits.

Personalize your offerings. Consider the demographics and preferences of your workforce. Younger employees might prioritize student loan assistance or career development programs, while those with families might value health insurance and paid family leave more.

Use benchmarking. Compare your benefits with those offered by similar businesses in your area or industry. This information can help you decide which benefits are must-haves and which could be scaled back or modified to better meet the needs of your employees while keeping costs manageable.

By carefully planning and considering these factors, small businesses can create a benefits package that not only attracts and retains employees but also aligns with the company’s financial capabilities and strategic goals. In the next section, we’ll explore how to calculate these benefit costs to further refine your budgeting strategy.

Calculating Employee Benefit Costs

When you’re setting up or adjusting the cost of employee benefits for a small business, understanding how to calculate these costs is crucial. Here’s a straightforward guide to help you navigate this process.

Total Annual Benefits

To start, compile the total annual cost of the benefits you offer. This includes everything from health insurance premiums to retirement plan contributions. For example, if you pay $500 per month for each employee’s health insurance, and you have 10 employees, your annual cost for health insurance alone would be $60,000.

Dividing by Salary

Next, relate these benefit costs to your payroll to get a sense of proportion and manageability. A common approach is to express total benefits cost as a percentage of total salaries. If your total annual salaries are $500,000 and your benefits cost $60,000, then your benefits are 12% of your salary costs. This ratio helps in comparing your spending with industry benchmarks or deciding if you can afford to enhance your benefits package.

Fiscal Year Data

It’s important to align your benefits cost calculation with your fiscal year. This alignment ensures that you account for any annual adjustments in employee compensation or benefits costs. For instance, if you plan to give raises or if the cost of health insurance increases, these changes should be reflected in your calculations for the upcoming fiscal year.

Example Calculation:

Let’s say your small business has:

  • 10 employees
  • Total annual salaries: $500,000
  • Total annual benefits cost (including health, dental, vision insurance, and retirement contributions): $60,000

– Benefits cost as a percentage of salaries = ($60,000 / $500,000) * 100 = 12%

This percentage tells you how much of your payroll budget is being spent on benefits. You can compare this with the typical benefits-to-salary ratio (about 1:3 or 33%) to assess if you’re spending below or above the norm.

By following these steps, you can ensure that your benefits spending is strategic and sustainable, aligning with both your business goals and employee needs. Moving forward, we’ll look into key components of employee benefits to see which ones are most critical and how they can be managed effectively.

Key Components of Employee Benefits

Health Insurance

Health insurance is often the cornerstone of an employee benefits package. According to the Kaiser Family Foundation, the average annual premium for single coverage in 2020 was $7,470, while family coverage averaged $21,342. Single vs. Family Coverage costs vary significantly, impacting how small businesses budget for health benefits. Offering health insurance not only supports employee health but also enhances job satisfaction and retention.

Life Insurance

Life insurance is an affordable way to provide financial security for your employees’ families. The cost is relatively low, often around 0.1% of total compensation, making it an attractive benefit for small businesses. Tax benefits also exist as premiums are generally deductible as a business expense. When determining the coverage amount, consider factors like the employee’s salary and the financial needs of their dependents.

Disability Insurance

Disability insurance is crucial for providing income security to employees who are unable to work due to illness or injury. There are two main types: Short-Term (covering a few months) and Long-Term (covering from a few years to retirement). The cost of providing this insurance is typically about 0.3% of total compensation, offering a significant sense of security at a relatively low expense.

Workers’ Compensation

Workers’ compensation is mandatory in most states and covers employees injured on the job. The cost varies based on risk factors associated with specific job roles. Premium calculations are influenced by the nature of the work and the company’s claim history. It’s essential to understand your state requirements to ensure compliance and proper coverage.

Retirement Plans

Offering retirement plans like a 401(k), SEP-IRA, or Simple IRA can significantly enhance your benefits package. These plans not only help employees save for the future but also offer tax advantages to both the employer and the employees. Employer matching contributions can vary, but they significantly enhance the value of this benefit, helping to attract and retain top talent.

Additional Benefits

Beyond the basics, consider offering PTO (Paid Time Off), fringe benefits, wellness programs, and flexible hours. These benefits help create a balanced, healthy work environment. For instance, PTO contributes to better work-life balance, while wellness programs can reduce healthcare costs and improve overall employee well-being. Flexible work hours can be particularly attractive, offering employees the ability to manage their work and personal life more effectively.

By understanding and carefully selecting from these key components, small businesses can design a benefits package that meets the needs of their employees while managing the cost of employee benefits for a small business effectively. This strategic approach not only supports your team’s well-being but also aligns with your business objectives, enhancing your company’s appeal to current and prospective employees.

Managing Costs and Maximizing Value

When it comes to managing the cost of employee benefits for a small business, it’s crucial to focus on getting the most value for your investment while keeping expenses under control. Here, we’ll explore effective strategies including provider selection, fee transparency, personalization, benchmarking, and administrative efficiency.

Provider Selection

Choosing the right benefits provider is the first step to controlling costs. Look for providers known for their reliability and quality of service. Steven Cardwell from Premise Health emphasizes the importance of a provider’s return on investment, noting, “Cost is important; we want those dollars in the field… we need them to support those that are supporting our clients.”

Fee Transparency

Always opt for providers who are upfront about their fees. Hidden costs can quickly escalate the overall expense of benefits. For instance, Benepass is highlighted for its no hidden fees policy, which includes no charges for foreign exchange, support, or replacement card fees, making budgeting more predictable.


Personalization of benefits can significantly enhance employee satisfaction without necessarily increasing costs. Josh Zygmont from the HR Works podcast points out how personalization is a key trend, allowing benefits programs to evolve in response to employee needs. Tony Angeleri from Lone Wolf Paintball suggests, “Instead of a blanket benefits program, go the extra mile to personalize specific options so that each employee is allowed that one benefit they’ve been looking forward to.”


Benchmarking your benefits against those offered by other companies in your industry can help ensure you’re not overspending while still remaining competitive. Utilize resources like the Benepass Benefits Benchmarking Guide to compare your program against both local and national averages.

Administrative Efficiency

Streamlining the administration of your benefits can save both time and money. Avoid common pitfalls such as accidentally charging the wrong amount for coverage options or missing important enrollment dates. Regular reviews and updates to your benefits administration process can prevent costly errors and inefficiencies.

By focusing on these areas, you can effectively manage the cost of employee benefits for a small business while maximizing the value they provide to your employees. The next section will explore frequently asked questions about employee benefits for small businesses, providing further insights into budgeting and cost-effective benefit options.

Frequently Asked Questions about Employee Benefits for Small Businesses

How Much Should I Budget for Employee Benefits?

When budgeting for employee benefits, it’s crucial to consider both the direct costs and the strategic value they bring in attracting and retaining talent. On average, benefits can cost about 1.25 to 1.4 times the salary. That means if you spend $50,000 on salaries, your benefits package might cost between $12,500 and $20,000.

Quick Tip: Start by setting aside at least 20% to 30% of your payroll budget for benefits. This can cover health insurance, retirement plans, and other essential benefits.

How Do I Calculate the Cost of Employee Benefits?

To calculate the cost of employee benefits for a small business, follow these steps:

  1. List all benefits you plan to offer (health insurance, retirement plans, etc.).
  2. Determine the cost for each benefit per employee. This might include premiums for health insurance or contributions to retirement plans.
  3. Add up the costs for all benefits to get the total per employee.
  4. Multiply by the number of employees to get your total benefits cost.

Example: If health insurance costs $500 per employee and you have 10 employees, your total cost for health insurance would be $5,000.

What Are the Most Cost-Effective Employee Benefits for Small Businesses?

Finding cost-effective benefits means balancing affordability with attractiveness. Here are some options:

  • Health Reimbursement Arrangements (HRAs): These allow you to reimburse employees for medical expenses up to a set limit, giving you control over costs.
  • Group Insurance Plans: Buying insurance as a group can offer significant savings compared to individual rates.
  • Voluntary Benefits: Employees pay partially or fully for benefits like dental or vision insurance, reducing your costs.
  • Wellness Programs: These can include activities like fitness challenges which improve health and can reduce long-term insurance costs.

Remember, the key to managing employee benefits effectively is not just about finding the cheapest options but providing value that meets your employees’ needs and supports your business goals.

By addressing these frequently asked questions, you can better understand how to manage and compete with your employee benefits offerings, ensuring you attract and retain top talent while managing costs.


Investing in employee satisfaction is not merely a cost but a strategic move that significantly enhances your business’s overall performance and reputation. At Tigner Financial, we understand that the well-being of your employees directly influences their productivity, loyalty, and the quality of service they provide to your clients. That’s why we emphasize the importance of a comprehensive benefits package, which includes not just the basics but also targeted benefits like whole life insurance.

Whole life insurance is a cornerstone of our expertise at Tigner Financial. Unlike term life insurance, whole life policies provide lifelong coverage and can also accumulate cash value, offering a financial safety net that employees can rely on for their future. This type of insurance is particularly valuable as it provides both security to your employees and their families, and a potential investment opportunity for their long-term goals.

Here’s why investing in whole life insurance and other employee benefits is crucial for your small business:

  1. Employee Retention: Attractive benefits packages are key to retaining top talent. Employees are more likely to stay with a company that invests in their health, security, and future.
  2. Employee Attraction: In today’s competitive job market, a robust benefits package can set your small business apart from others, attracting highly skilled professionals.
  3. Tax Advantages: Investing in employee benefits, including whole life insurance, can offer your business significant tax benefits, reducing your overall tax burden.
  4. Enhanced Productivity: Employees with access to comprehensive benefits experience less stress and better overall health, contributing to higher productivity levels.
  5. Long-Term Savings: While the upfront costs might seem high, the long-term savings from reduced turnover, lower recruitment costs, and increased employee loyalty can be substantial.

At Tigner Financial, we’re committed to helping you navigate the complexities of employee benefits. We tailor our services to meet the unique needs of your small business, ensuring that you can provide competitive, cost-effective benefits without sacrificing quality or financial stability.

To learn more about how we can assist you in enhancing your employee benefits package with services like whole life insurance, visit our group insurance services page.

Investing in your employees is investing in the future of your business. Let us help you build a brighter future for your business and your team.