How Much Should I Pay My Employees?

Did you know that most Americans are not happy with their salaries? Though it takes more than a good salary to keep your employees happy, it is every employer’s responsibility to ensure that they pay their employees right. Employees deserve fair compensation and everyone deserves a livable wage.

Almost every employer has struggled with the question, “How much should I pay my employees?” This question is very common if the employer is hiring for the first time, or if they do not have a human resource department.

When deciding your employees’ salaries, you have to ensure that you comply with the wage and hour laws, pay according to the right scale, consider inflation, unions, and more.

There are a lot of things that you have to consider so that they can offer your employees a competitive wage. To help you decide how and what you should pay, keep reading this guide on employee payments.

How to Pay Employees

Every employer wants to offer a good salary that will attract good talent. While this is right, the salary you pay should not only attract a good employee but should also retain them. You also do not want to stretch your budget too much.

There are several laws that regulate employee salaries. To get it right, some employers choose to work with a good payroll service. Should you decide to scale the salary on your own, here are some of the things that you need to do.

Create a Job Description

Start by creating a detailed job description. Write down every detail of the job and what you expect from the employee. This is not necessarily an indicator of the pay, but once you know what you expect from your employee, you will know the average wage to offer.

You want to make sure that the job description is as detailed as possible so that the employee also knows what they are applying for. Try not to use titles only, they are not very specific, and some companies have different functions for a similar title.

When writing down the job description, do not forget to consider the skills, education, and experience.

Know the Average Pay Rate

With the keywords from the job description, you can search for the average pay rate online. You can check out sites like PayScale, Glassdoor, Salary.com, and BLS.gov for the rate. This rate varies according to regions and industries.

Know the low, average, and high pay rate for the jobs because it will help you determine your pay range. Which end of the pay spectrum your company goes could determine which applicants you will receive.

Have a Budget

Your budget is very important when determining your employee’s compensation. In as much as you want to not only hire but also retain the best employees, you need to have a budget that will allow you to pay your employees, make a profit, and grow.

Depending on your industry, if you want to hire qualified talent, you should be ready to spend between 40% to 80% of your gross revenue on employee salaries plus benefits.

To know your gross revenue percentage, you should divide the revenue you collect by the total wages. Multiply the answer you get by 100 to get the percentage. For example, if your annual gross revenue is $100,000, and you spend $20,000 on payroll, your gross revenue percentage is 20%.

You have to take your budget, gross revenue, your return on investment into consideration. With this, you will know what value the employee is adding to your company and how to compensate them for it.

The budget you create will also help you know if you can afford to pay the salaries, benefits, and also offer salary raises. Remember, the gross revenue percentage will vary according to the industry.

Consider Employee Benefits

Apart from the basic salary, there are other benefits that you should offer your employees. Take into account benefits such as health insurance, dental, and life insurance. The costs of such benefits can equal 20 or 30 percent of an employee’s salary.

State and labor laws also require all businesses to pay leave benefits, social security taxes unemployment insurance, and workers’ compensation. Other optional benefits that you should consider are retirement benefits and group health plans.

Employees Pay Expectations

As you conduct interviews, you can expect that the candidates you interview will have a salary expectation. This is why it is very important that you negotiate with a salary range in mind. If a candidate meets the qualifications, you may want to offer them a medium salary.

For candidates who exceed expectations, you should try enticing them by offering a higher range salary. This is because such candidates have a lot of value to add to your business.

Always keep in mind your ROI while negotiating salary with your potential employees. This is especially important when offering a higher range of compensation. Ensure that the candidate can deliver what you are hiring them for and also help you make profits before making the offer.

Laws About Paying Your Employees

Though there are a lot of things you have to consider, the legal parameters are some of the factors that you cannot ignore when determining the salaries. When it comes to federal, labor, and state laws, you have to get it right. Ignoring legal requirements when it comes to salary or hourly wages could get your company shut down one way or another.

Exempt vs Nonexempt Employees

The FLSA recognizes two types of employees; Exempt employees (who include Administrative, professional, and executive workers) and nonexempt employees.

According to this law, exempt employees are not subject to overtime pay and minimum wage laws. You have to pay them a salary irrespective of how many hours they work.

Nonexempt employees, on the other hand, are entitled to overtime pay and minimum wage. These employees are paid hourly, but you can also choose to pay them salaries. Check out the Department of Labor fact sheets for more information.

Labor Laws

You have to comply with the laws that govern exempt and nonexempt employees when determining how much you should pay your employees. However, the Fair Labor Standards Act (FLSA) sets the minimum wage and overtime pay rates for all employees whether full time or part-time.

The pay standards are for employees in the private sector, federal, state, and local governments. For example, the federal minimum wage is $7.25 per hour, while the minimum wage in Florida is $11 ($12 in late 2023), and New York $14.20 hourly.

Try to ensure that you know the current hourly minimum wage and the wage laws in your state. Remember, you cannot pay below the minimum wage, and if you want to attract the best and qualified talent, you have to pay more than the minimum wage.

The wage and hours division in the Department of Labor has tools that every employer can use to calculate how much you should pay according to the hours an employee works and overtime. According to the law, you can count tips as part of your employees’ wages if they collect more than $30 in tips monthly. However, you will still have to pay them at least $2.13 per hour on a federal level. This rate is higher in some states though like Massachusetts.

Reimbursement

Though not all states stipulate reimbursements, other States such as Illinois and California require employers to reimburse their employees for work-related expenses. You may have to pay for the food your employees eat while on a business trip or mileage for employees who use their cars for work.

The IRS provides a rate for mileage reimbursement, and this rate is determined by the gas prices and the average wear and tear of the vehicle. This rate also varies according to the industry, and it is used to deduct mileage on employee taxes should the employer fail to reimburse them.

Though it is not law, it is standard practice and will also motivate your employees. Therefore, while you are thinking about the interests of your business, try to ensure that you are fair and reasonable.

How Much You Should Withhold From Employees Paychecks

Now that you know how much you should pay your employees, the next thing is to know how much they should take home. Apart from the salaries and benefits, there are other allowances like travel and leave allowances that you should pay.

The amount of money you hold back will depend on:

The payroll period
Allowances claimed
Gross pay
Employee’s marital status
The maximum Social Security withholding amount for the payroll year
Employee’s most recent Form W-4, FICA tax withholding percentages for the current year

Refer to IRS publication 15A or the withholding calculator to calculate how much you should withhold.

Your employees are your investments. You want to make sure that they are able to help your business grow, but they should also be happy while doing so.