When I’m helping shops analyze their company financials, a common issue I see is business owners underestimating the true costs associated with each employee (technicians, specifically — and thus underestimating what that technician needs to produce to help the business succeed financially.
Maria Quintero of Collision Advice said it’s important to consider the true costs of an employee when considering what that employee needs to produce.I asked one awesome member of my team at Collision Advice to walk me through an example of what that looks like. Maria Quintero is a rock star when it comes to shop bookkeeping and financial practices. In her more than 25 years in this industry, she’s worked in virtually every administrative position within a collision repair business, starting as a receptionist and working her way up before eventually becoming co-owner of that collision repair business in 2021. For Collision Advice, Maria conducts our “QuickBooks Bootcamp” and other accounting training, helps our shop clients establish an industry-specific chart of accounts, conducts on-site and remote consulting on finance and accounting best practices, and more.
I asked Maria to walk me through this hypothetical: Let’s say a shop is paying a technician $75,000 a year. What is the true cost of that employee to the business?
“It really ends up being roughly around $111,000,” Maria said.
If that number surprises you, let’s talk through how she gets to that figure.
“So there’s payroll taxes you need to pay,” Maria said. “FICA (the Federal Insurance Contributions Act) across the country is 6.2%, and then Medicare is 1.45%. So right there, that’s 7.65% of the employee’s wage you have to add to the cost.”
There are also federal and state unemployment taxes (the Federal Unemployment Tax Act, or FUTA, and the State Unemployment Tax Act, or SUTA).
“The standard FUTA rate is 6% on the first $7,000 paid to the employee in a calendar year,” Maria said. “SUTA varies by state, but in Illinois, for example, it is 3.3% on the first $12,000.”
Again, add those costs to the $75,000 base wage.
Next, the cost of workers’ compensation insurance is also going to vary based on each business’s “experience mod,” essentially how many claims the company has had.
“But generally for a technician, you can see rates anywhere from 3% to 6% for workers’ comp,” Maria said.
A shop employee earning $75,000 in wages may actually cost the shop well over $100,000 when all the true costs are calculated.From there, the additional costs in Maria’s calculation are based on the benefits the shop offers that employee: vacation or other paid time off, health care coverage or other insurance (life, disability, dental/vision), uniforms, etc. She said her calculation for these costs was pretty conservative, presuming the shop is paying only a portion of the insurance costs, for example.
“And none of this includes training costs,” Maria said. “I calculated in $15,000 for training for that $75,000-a-year technician.”
And all of that combined brings you up to the $111,000 mark Maria estimates for that technician.
“If you think about it, you’re adding anywhere from 40% to almost 50% of their wages in other costs,” Maria said. “That’s what you have to consider when you’re calculating what that technician needs to produce to essentially bring back in all the costs associated with their employment for the business. If you’re just thinking about the $75,000 wage, that comes out essentially to about $36 an hour. But when you take all the true costs into account, it’s more like $53 an hour.”
This is one of the things I appreciate about having Maria on our team: She can very quickly walk you through something that’s more complex than you might first think to help you understand, in this case, the true cost to your business of that $75,000 technician.
In upcoming columns, I’ll focus on some other aspects of these calculations, such as the true cost of training (and how it should influence your labor rate), and issues related to gross profit on labor based on whether you are looking at a “loaded” or “unloaded” profit and loss statement.
Mike Anderson