The Costs and Benefits of Hiring an Employee

Most family child care providers who hire employees do so primarily because they can expand their program and care for more children.

But, there are a number of costs and benefits that should be considered before taking this step.

First, let’s look at the benefits.

  • Increased quality of care that an additional adult can bring
  • Another adult you can talk to
  • The ability to help someone who needs a job; and
  • Increased flexibility that allows you more control over your schedule.

There is also a downside when you hire an employee.

  • You must pay a number of federal and state payroll taxes and file a series of tax forms
  • You must purchase workers’ compensation insurance
  • Because you are responsible for virtually anything your employee does, you must take the time to properly hire, supervise and possibly fire employees.

 The Financial Side of Hiring an Employee

Will hiring an employee actually increase your profit?

The answer depends on how many more children you enroll after hiring an employee.  To take a close look at this, providers should examine the additional costs of hiring an employee as compared to the additional income on enrolling more children.

Let’s look at an example: Lainie Provider decides to hire an employee at the federal minimum wage of $7.25 per hour (your state minimum wage may be higher). Here are her additional weekly costs:

  • Wages: $7.25 per hour x 40 hours per week (overtime is due for more than 40 hours of work in a week) = $290
  • Payroll taxes (7.65% Social Security/Medicare tax + .6% federal unemployment tax) = $24
  • State unemployment tax: varies
  • Workers’ compensation insurance: varies
  • Other employee costs (training, supplies, food, benefits, etc.): varies

Total weekly employee costs: $314+

To offset this additional expense, Lainie would have to enroll two additional children at $157+ per week to break even. This doesn’t include the possible additional costs of food, toys and supplies needed for two more children.

I’ve created an online tool (Hiring an Employee Worksheet) you can use to plug in your numbers and quickly see how much you will need to charge to break even.

As a general rule, you won’t increase your profit until you care for more than two additional children after hiring a full-time employee.

You should also consider what can happen if you have a drop in enrollment.

Let’s say under your state’s licensing rules you can care for no more than ten children, but with an employee you can care for up to fourteen children. You decide to hire an employee and you enroll two additional children under your state licensing rules. If one child leaves your program, you can’t reduce your employee hours, so you are likely to start losing money. To avoid this you would have to ask another child to leave to bring you down to the proper ratio and then lay off your employee because you wouldn’t need her anymore.

Therefore, from a strictly financial point of view, I would suggest that you not hire a full-time employee unless you are confident that you can enroll (and keep enrolled)  at least three additional full-time children.

For some providers the non-financial benefits may outweigh the financial risks. I know of providers who are very successful and have several employees. I know of other providers who didn’t realize the actual costs of hiring employees and found out later that their employee earned more than they did.

Plan ahead before making this decision.

Tom Copeland –

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Categories: Employees, Record Keeping & Taxes

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