The financial readiness check before your first hire
The first hire breaks businesses in a specific way: budgeted at salary, actually costing 1.25–1.4× salary, and arriving just as the owner's time gets consumed by onboarding. This lesson is the readiness check — the true monthly cost math, the legal add-ons, and how to know whether you're actually ready or just tired.
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The real cost: salary is just the base
| Cost layer | Typical range | Notes |
|---|---|---|
| Gross salary | The number you quoted | The anchor everything scales from |
| Employer payroll taxes | ~7.65% + federal/state unemployment | The invisible chunk on top of every check |
| Workers' compensation | 0.5–5% of wages by industry | Legally required in nearly every state for employees |
| Benefits (if offered) | $0–$800+/mo | Health, retirement match, PTO — huge variance by market and role |
| Equipment & software | $500–3,000/yr | Laptop, tools, seat licenses |
| Your time | The hidden one | Onboarding, training, management — weeks of your own hours in month one |
Plan on 1.25–1.4× salary for a simple office-type hire, higher with benefits. A $48,000 salary is realistically a $60,000–$67,000 year-one commitment before your time is counted.
Are you ready — three honest tests
- The overflow test: is there sustained, documented work left undone — not a busy week, but weeks where billable or essential work got dropped? Write down the tasks the hire would own; if you can't name them, the problem isn't headcount.
- The cash test: can you fund the position for 6 months from cash flow plus your reserve — WITHOUT the new revenue the hire theoretically unlocks? If the hire must pay for themselves in month two, you're hiring hope, not capacity.
- The margin test: does the work they'd do carry enough margin to absorb the true cost? (Pricing lesson applies: know your hourly floor before you divide it.)
Structures that cost less than an employee
Before the first W-2: a contractor for the overflowing specialized work (hours billed, no taxes/benefits on you), a part-time role instead of full-time, or process fixes that delete the work entirely (templates, automation, a better tool). Not anti-hiring — anti-hiring-for-problems-that-aren't-headcount.
Hire when the work is patient and proven. The first hire made from exhaustion rarely survives the first quarter of payroll math.
The JK23 Ledger Letter, issue 10
Frequently asked questions
Contractor vs. employee — can I just call everyone a contractor?
The IRS decides based on control and integration (who sets hours, how central the work is, permanency), not what you write on the agreement. Misclassification back-charges taxes and penalties — a real risk with real rules; your state's test may be stricter than the federal one.
When does payroll software / a service make sense?
With the first W-2 employee, honestly: the employer-tax filings and state registrations are exactly what the service does for ~$40–80/month. DIY payroll as a first-time employer is a strong candidate for 'the money you save costs more.'
What about a raise for me instead — take the profit and don't hire?
Sometimes the right answer! If the work overflow is occasional, seasonal contractors and a fatter owner draw may genuinely beat a permanent fixed cost. The lesson's tests still apply — they're symmetric.