Business Solutions Center
Human Resources


For all employers, and especially small business owners, benefits are an important ingredient in the "attract and retain employees" recipe for having the right people to perform your business's important roles/tasks.

But, benefits can be costly and time consuming. As a percentage of payroll or salary/wage costs, benefits can account for between 10% and 55% of your payroll.

If this isn't enough to grab your attention when considering funding or adding benefits to your compensation costs, you also need to know that benefits can be tricky and complicated.

So, what do you do? What's a small business owner to do, knowing that some benefits must be offered or he will lose the all-important "attract and retain" game? Let's talk about benefit categories (Legally Required, Time-Off, Social, and Future Financial Security) and for some specific benefits, let's go back through the list and determine some alternatives that could save you money and provide you with more control of both current and future benefit costs.

Legally Required Benefits (Cost: 10% to 13%)

  • Social Security taxes (paid by both the company and employee)
  • Medicare taxes (paid by both the company and employee)
  • Federal and State unemployment taxes (paid by the employer)
  • Workers' compensation insurance or state taxes (paid by the employer)
  • Overtime compensation (for employees not exempt from the Fair Labor Standards Act {Federal and/or State})
  • In some states, contributions to short-term disability programs
  • Provide up to two hours for each employee to vote in elections, if requested

As the name of this category suggests, all businesses, no matter how many people are employed, must abide by the provisions of these federal or state laws. Depending on the nature of your business and the cost for Workers' Compensation insurance (some states require employers to pay taxes based on wages paid to employees and the experience rating of the company), generally the benefit "cost" of this category ranges between 10% to 13% of payroll.

Cost Savings Ideas

Other than having no employees, there is not much that can be done to ameliorate the cost associated with legally mandated taxes and benefits. Luckily, most small business owners are exempt from many federal and state laws if they do not meet threshold levels of employment.

Time-off Benefits (Cost: 6.5%)

These benefits provide for time away from work for a variety of good and sufficient reasons that all employers face when dealing with employees who have other demands placed on their time. Time away from the job can be paid or not paid depending on what you wish or need to offer your people to recruit and retain them.

  • Holidays
  • Vacation
  • Sick leave
  • Bereavement leave
  • Jury duty
  • Military leave
  • Personal and Medical leaves of absence (consult an employment lawyer to see if the Family Medical Leave of Absence legislation at the federal and state level applies to your business)
  • Flexible hours/schedules
  • Telecommuting
  • Job sharing

At a minimum, to be competitive a small business owner must provide at least six paid holidays per year, 10 paid vacations days per year, the "average" annual sick leave usage of four days per year, and at least one day should an employee experience the death of an immediate family member. In total, 20 days of paid time-off per year is competitive.

This amount of paid time-off is equivalent to 6.5% of all annual available work days, so it would "cost" an additional 6.5% for time off (Note: Paid time-off does not add to your annual payroll cost. Paid time-off only means that there is no "productivity" for paid days off.)

Cost Savings Ideas

There are no legal requirements to provide paid time-off. Since each of your employees may have their own notion of which days off are important to them, whether they are holidays or vacation days, one strategy is to provide something that has been called Flexible Time-Off (FTO).

Flexible paid time-off is an approach that can save you money and provide your employees with a choice of when they want to use paid time-off.

What FTO does (unless you deem it wise to close the office/business on specific holidays) is lumps all paid time-off under one banner, including payment for any paid sick time-off.

And, rather than making a number of paid days off available at a specific time in a calendar year (e.g., January 1, 20XX), an FTO approach provides that employees earn FTO each week/bi-week/month worked (depending on your pay cycle) and employees can save this time-off up to a pre-set number of hours (usually a total of 18 days or 144 hours), over which they do not earn any more time-off until their "balance" is below the maximum allowed.

Other than the Flexible Time-Off approach, there is not much a small business owner can do to reduce the cost of Paid Time-Off except reduce the number of paid vacation days or declare that there are no paid sick/emergency days for anyone.

On the flip side, granting additional paid days off in recognition of extraordinary effort or achievement is a relatively low-cost employee "reward" that is highly appreciated.

Social Benefits (Cost: 17% to 31%)

  • Health insurance (includes pharmacy)
  • Dental insurance
  • Long-term disability insurance
  • Vision care insurance
  • Life insurance
  • Short-term disability insurance
  • Child care subsidies/facilities
  • Elder care subsidies/facilities
  • Employee Assistance programs (counseling)
  • Education/tuition assistance reimbursement

"Social Benefits" are not based on wages, but the market cost to acquire insurance or pay for programs like child care/day care. As a business owner and purchaser of this type of benefit, you have very little control over the current and future cost of such benefits, especially for health/medical/pharmacy and dental insurance.

Long-term disability insurance is usually relatively inexpensive until a claim is filed (a bit less than 1% of annual pay).

Depending on the type of dental insurance coverage, it, too, can be fairly inexpensive, adding another 2% of annual pay to the Social Benefits cost. If you were to provide company-paid health (including pharmacy), dental and LTD insurance, you would be more than competitive and this benefit category's cost would be somewhere between 17% and 31% of annual wages depending on the average annual compensation you pay to your employees.

There are many ways for the employer to provide traditional insurances for health, dental, disability, and life, and the most straightforward choice is to purchase insurance that provides basic coverage at the least expensive cost on behalf of your employees.

Cost Savings Ideas

One way to save money, especially on health care, is to join an association comprised of a large number of people and use the power of numbers to negotiate the best rate possible for insurance coverage. There are many such professional/trade associations throughout the United States and you may wish to check with them to see if your company qualifies for participation and what their insurance rates might be.

Future Financial Security (Cost: 0% to 5%)

  • Pension plans
  • 401(k) plans
  • Profit sharing plans
  • Employee Stock Ownership plans (ESOP's)
  • Deferred Compensation plans
  • Stock Option plans

(Note: Federal Social Security and Medicare are not listed here because they are legally required benefits, but both affect this category of benefits as will be discussed later.)

You are already making an employer contribution to Social Security and Medicare and that accounts for 7.65% of annual wages. Above these legally required benefits, most small business owners do not have a company program covering Future Financial Security for its employees that results in a fixed cost (e.g., a 401(k) plan, including a company match on employee contributions). So, for Future Financial Security benefits, the annual cost to the average small business owner could range between 0.0% to 5%.

As a rule of thumb, over the working life of an individual, people must save enough money so that, when combined with Social Security income, they have funds that will enable them to replace 80% of their annual pre-retirement income for the remainder of their lives.

Suffice it to say, there is a great deal of pressure on employers (both small and large) to provide Future Financial Security benefits since what is available from other sources is insufficient to meet the total need.

For many years, the employer's response to this need was to make contributions to a "company" pension plan. These plans were initially modeled around the reality of near "lifetime" employment with the same company. Coupled with Social Security, someone who worked for 35-40 years for the same company and retired at age 65 could have a modestly comfortable retirement. Of course, when this model was popularly adopted, the life expectancy of retirees was nowhere near what it is in the twenty-first century.

Today, if there is a future savings plan sponsored by employers, the trend is to provide some mechanism for employees to put pre-tax money into a plan like a 401(k), sometimes with an employer-matching contribution, and let the employee manage her/his investments and essentially "own" his/her "future savings" plan without interference or a great deal of help from the employer.

Cost Savings Ideas

First, if you as a company do not have a 401(k) plan or a pension plan, your employees may set up and contribute to their own Individual Retirement Accounts (IRAs, which are essentially tax-qualified individual 401(k)s, if you will).

Contributions are on a pre-tax basis and earnings are not taxed until withdrawn. Any contribution you, as the employer, might make would be achieved by providing a periodic participation stipend in the form of taxable, additional cash compensation you pay to your employees for them to add to their savings.

Second, and similarly, your employees could also open a Roth IRA. While contributions are made after tax, withdrawals made after retirement are not taxed. There are annual income limitations on who is qualified to contribute to a Roth IRA. Any contribution you, as the employer, might make would be achieved by providing a periodic participation stipend in the form of taxable additional cash compensation.

A variation on a theme for these first two cost-saving ideas could be that any stipend you might give to your employees would be tied to the profitability of your company; in some years it might be paid and in other years it might not, depending on the financial performance of the business.

The information included on this website is designed for informational purposes only. It is not legal, tax, financial, or any other sort of advice; nor is it a substitute for such advice. The information on this site may not apply to your specific situation. We have tried to make sure the information is accurate, but it could be outdated or even inaccurate, in parts. It is the reader's responsibility to comply with any applicable local, state, or federal regulations, and to make their own decisions about how to operate their business. Nationwide Mutual Insurance Company, its affiliates, and their employees make no warranties about the information, no guarantee of results, and assume no liability in connection with the information provided.