An employee benefits analysis can be beneficial
Barbara Sack, MHSA, CMPE, and Debra L. Mitchell, RN, BSN, MBA
Knowing and understanding the total cost of an employee to the practice is vitally important both to the practice executive and to the physician owners. Just as important is ensuring that employees understand the value of their full compensation package.
Many employees simply assume that their cost to the practice equals their gross paycheck. But in an increasingly competitive job market, benefits may also be a key strategy to attracting and retaining valuable employees. And the cost of providing these benefits may be significant.
Beyond a base salary, major expenses associated with each employee include taxes, benefits, and training costs. Knowing these numbers and sharing them with employees can be beneficial for several reasons. For example, the total cost of an employee is important when creating business plans and budgets or performing cost analyses. This article reviews employer costs for taxes and benefits.
The practice (employer) pays at least three different payroll taxes. First is the employer’s share of social security taxes (6.2 percent of the first $113,700 of earnings). In addition, the practice collects and submits the employee’s share of these taxes (6.2 percent of the first $113,700 of earnings).
The second payroll tax is for Medicare. The practice is responsible for half of this tax, which equals 2.9 percent of all earnings (no cap). The practice must also collect and submit the employee’s half of this tax as well.
Finally, the practice must pay unemployment insurance (FUTA); for 2013, the standard rate was 0.6 percent for the first $7,000 of earnings, or $42 per employee per year.
In addition, the practice may have to withhold certain state and local income taxes and purchase worker’s compensation insurance. Each state and locality has different requirements; practices must make sure they know and follow the requirements for their locations.
In Florida, for example, the current worker’s compensation rate for physician/clerical workers is 0.45 cents for every $100 in gross payroll or 0.045 percent of gross payroll. Florida, like some other states, has no state or local taxes.
Some states have depleted their unemployment funds and have borrowed from the federal government. States that don’t repay the loan on a timely basis become credit reduction states, and employers in those states will pay higher unemployment taxes.
According to the Bureau of Labor Statistics, in March 2014, the average hourly cost for compensating a private sector employee is $31.93, once all employer expenses are added in. Wages and salaries account for 68.8 percent of the total, while benefits made up the remaining 31.2 percent.
That 31.2 percent in benefits breaks down as follows:
- Health insurance benefits—8.6 percent
- Other insurance benefits—0.5 percent
- Retirement benefits—5.0 percent
- Paid leave—7.0 percent
- Supplemental pay (overtime and differentials)—2.4 percent
- Legally required benefits (social security and Medicare, federal unemployment insurance, state unemployment insurance, and worker’s compensation)—7.7 percent
With this as a guideline, practices can determine how their benefits stack up.
Completing the analysis
Completing a benefit analysis can be done using a spreadsheet program. It is a process of assigning dollar amounts to the benefits and showing how the benefits add to the employee’s pay rate. One way to present the data is to calculate the dollar value of benefits in annual figures and divide by 2080—the number of hours worked in a year (40 hours × 52 weeks). The benefit section is calculated using the practice’s annual cost for benefits.
Fig. 1 shows an example of a worksheet calculation, based on the employee’s position. This sample is specifically intended to show the employee the difference between the hourly wage used to calculate a paycheck and the amount per hour that the practice contributes in addition to that figure. This includes paid time off (PTO), such as vacations or sick leave, holidays, and other benefits.
A spreadsheet program can automatically calculate all areas shaded in green, based on the other information entered. Other cells are populated manually, but many contain formulas that take the monthly expense for an item and annualize it. (All wages used in these examples are fictional.)
At this practice, employees not only accrue PTO over the course of the year, they can also use it. What employees rarely recognize is that they receive an hourly wage both for time worked as well as for vacation and holiday time. This translates to a higher hourly wage for each hour actually worked. This can be demonstrated by taking the total wages paid and dividing by the actual hours worked, rather than by the hours paid.
Additional benefits are also shown, and the “Calculated hourly” amount is the additional amount total divided by the number of hours worked. Adding the result to the employee’s actual hourly wage shows how much the total compensation package is actually costing the practice.
Regardless of how the practice chooses to compile and present this information to staff, physician partners, or just for benchmarking, it is a useful and beneficial exercise to undertake and will provide valuable information in a meaningful format.
Barbara Sack, MHSA, CMPE, of Midwest Orthopaedics, PA, and Debra L. Mitchell, RN, BSN, MBA, of Children’s Orthopaedic and Scoliosis Surgery Associates, are members of the American Association of Orthopaedic Executives. This article is adapted with permission from the AAOE eNews, May 20, 2014.