Summary

The article discusses the intricacies of wages in small businesses, emphasizing the discrepancy between gross pay and net take-home for employees, as well as the additional costs employers incur beyond the stated salary.

Abstract

The content delves into the real-world implications of wage calculations for small business employers and employees. It illustrates how a manager's $59,000 annual salary translates to a net take-home pay of$ 44,000 after taxes and benefits, while the actual cost to the employer is $74,000 due to mandatory contributions and insurance. The article also explores the impact of minimum wage increases on small businesses, demonstrating how a hypothetical business with a$ 1 million annual gross might struggle to maintain profitability and staffing levels in the face of wage hikes. It suggests that businesses may need to raise prices, reduce the number of employees, or increase efficiency to absorb the higher labor costs, potentially affecting customer service and satisfaction.

Opinions

The author implies that employees should be aware of the true cost of their employment, including the taxes and expenses paid by the employer that they do not directly see.
There is a concern that government-mandated wage increases could negatively impact small businesses by forcing them to make difficult decisions such as laying off staff or raising prices.
The article suggests that the free market might be better suited to determine the value of an employee rather than government intervention.
The author believes that small businesses must carefully manage their payroll costs, aiming to keep them at a sustainable percentage of their gross income.
It is highlighted that price increases due to higher wages must be justified to customers based on the value of the goods or services provided.
The author seems to advocate for a balance between fair wages and sustainable business practices, acknowledging the challenges that wage increases can pose for small business owners.

How Wages Work in The Real Small Business World

There’s a lot more than gross pay

Suppose I need a middle level manager and decide I can pay $59,000 a year.

Let’s do some math. John my new manager has a gross base pay of $59,000 how much of that will John take home as net pay?

John will be on the hook for federal and state income taxes, his share of health insurance, state unemployment insurance, disability insurance, Medicare, and Social Security leaving John with a take home pay of $44,000.

How much I am the small business owner on the hook for?

I must pay John’s $59,000 salary plus, the company share of health insurance, life and any other insurance, federal unemployment insurance, disability insurance, Workman’s Comp Insurance, state unemployment insurance, Medicare, and the company’s part of John’s Social Security.

It will cost me $74,000 dollars to hire and pay John $59,000 so that he can take home $44,000.

Using advanced calculus that’s a difference of $30,000 that must come from somewhere.

John must produce more than $74,000 in business in order for me to justify keep him on.

Employees must pay for themselves.

John never sees the $30,000 in taxes and expenses that the business pays and what the business pays in his name.

He’s working for $44,000 not $59,000.

Let’s break it down further using Minimum Wage

A hypothetical business does $1 million gross in yearly business.

Most retail businesses try to keep their payroll costs at, or below, 15 percent.

In this case there would be $150,000 (15% of one million) available for payroll — or enough to pay 10 full time employees $15,000 per year each.

Hardly a living wage but this is a hypothetical example. Think numbers — not reality.

If minimum wage goes to $10.10 per hour what effect would that have on our hypothetical business?

That would put full time minimum wage at $21,000 per year.

To keep my payroll costs at 15 percent, I am either going to have to increase income, or lay off three employees.

I have no choice but to lay workers off because I can’t immediately bring in enough additional income in one monthly pay period to keep them all on.

If the minimum wage goes to $15 an hour, I have an even bigger problem.

I’m now paying $31,000 per employee, which means I can now only afford 5 employees.

But I’m still trying to do a million a year in gross business. Can I do that?

How to Do More with Less

In the past I could justify hiring ten people to do a million a year in business at the old minimum wage.

Now I must do that same million dollars with five less people. How will I do that?

Five less people will slowly take its toll on my business in poorer customer service, more errors, and unhappy customers.

Each employee would have to perform at twice the level they did previously.

And I can’t realistically ask them to do that.

My only real option is to reduce the number of customers to a more manageable level for the five employees to handle but not sacrifice income.

So, I must raise my prices.

Now, instead of 2,000 customers spending $500 dollars, I need 1,333 customers paying $750 to make the same $1 million with half the employees I used to have — and pay the ones remaining $31,000.

But the real cost was in the loss of over 600 customers and the remaining ones paying more — if they will.

I’m going to have to justify that price increase to my customers somehow.

All things being equal my competitors might be in the same boat.

Now the case could be made that I was charging too little for my goods and services.

The 2,000 customers might remain even with the price increase depending on the customer’s perceived value to them of what I’m selling.

If I can keep the 2,000 customers at the increased price, then over time I can add employees.

Keeping the lesson above of John the manager in mind minimum wage has the same costs to the small business.

All those federal and health costs must be paid by law.

Since this last example is strictly hypnotical you make the call.

Should the free market or the government decide the value of an employee?

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