The Hidden Costs of Operating a Business

Do you know the real cost of running a business? Let’s take personnel, for example. You might think personnel costs are limited to salary and bonuses, but there are a number of ancillary costs that can increase this expense by up to 35% per hire. If you plan for these costs in advance, you won’t be caught by surprise, and more importantly, you’ll have the runway to execute on your vision. We’ll review these common expenses below and share a free tool that will make your life easier.

Salary Load

A “load” is a markup to employee salaries to account for ordinary expenses such as payroll taxes and benefits. Payroll taxes are approximately 8% of an employee’s salary and benefits add another 12%. The best rule of thumb is to add at least 20% to an employee’s base salary (salary*1.2). If you’re hoping to attract key talent by offering a rich benefits package — let’s say by providing highest tier of medical coverage or making significant contributions to your employees’ dependent costs, you should plan for a 22% to 30% load.

Note: If you’ve made the decision to keep salaries artificially low in the early days via a salary cap or the like, you’ll need to increase the load if you plan to offer benefits. When in doubt, add a cushion.

Distributed team

If your team is distributed, you’ll need to establish payroll in multiple states. This comes with a price tag of approximately $1,000 per state for the initial set-up. You’ll also be responsible for filing taxes in those states (approximately $1,000 per year) and paying a local or state business license if applicable. For example, San Francisco’s business license is $750 per year; we pay this for simply having an office in San Francisco. However, Finance veterans will tell you that the real cost is incurred when you decide to cancel payroll in a particular state — usually to the tune of $3,000 plus the cost of the administrator’s time.

Recruiting

Recruiting is another multi-dimensional expense. Here are some examples:

• Engaging professional recruiters/search firms: ~$30k per individual contributor and ~$125k per executive
• Attending hackathons/conferences: ~$1–2k per event for travel and conference fees
• Treating candidates to coffee/meals in the interview process: ~$20 per meeting
• Sponsoring H-1B visa transfers: ~$5k to $6k per candidate
• Schwag — if you’re distributing t-shirts at a campus recruiting event for interns: ~$1k per event.

Long story short: you’ll need to define a hiring process that aligns with your company’s goals and budget accordingly.

Laptops, etc.

Equipment costs come into play once you make a hire. Most employees will need a laptop ($1k-$3k) and a monitor ($200-$400) at the very least. It’s also important to factor in incremental user costs for tools like Google Apps, Slack, and Zoom. So, you’re looking at a minimum of ~$3k per new hire. These costs may seem obvious until you’re going through the bottoms-up process of building a budget for x number of months. Make sure to match these expenses to your hiring plan — both in timing and amount!

Taxes

Taxes are something every company needs to plan for, even pre-revenue companies. Filings should be made at the federal, state, and, city levels, if applicable. For example, Manhattan requires a separate filing from New York state. If your company is incorporated in Delaware, you’ll be on the hook for the Delaware Franchise Tax and for returns in states where you have employees on payroll. The key is to allocate resources to tax preparation — typically handled by a firm — and to taxes owed. Tax preparation is roughly $1.5k per filing, and taxes owed vary significantly based on geography and the financial profile of your business. Make sure to consult a trusted tax accountant.

Insurance

Insurance is another prerequisite. It comes in many flavors and varying tiers, but Workers’ Compensation, Directors and Officers (D&O) insurance, and General Liability are the most common policies in the early phases of a company’s life. You might also be required to have policies for coworking spaces (Liability Insurance). The cost of insurance can range from hundreds to tens of thousands of dollars in the earliest stages depending on coverage and the nature of your business.

Intellectual Property

Patents and trademarks are the last general corporate bucket. Here it’s important to plan for legal counsel and filing fees ($5–15K per matter). The examiner often comes back with questions about your applications, so make sure to account for some back and forth in the budget process. The quality of legal counsel matters here, especially if intellectual property is essential to your competitive advantage!

Here’s a quick checklist of the common business expenses we’ve covered:

Personnel

• Cash compensation (salary & bonus)
• Salary load (at least 20%)
• New payroll setup
• Recruiting
• Professional searches
• Meals/coffees
• Events/conferences
• Visa transfers
• Schwag
• Equipment

General Corporate

• Taxes
• Tax prep
• Tax filings
• Insurance
• Worker’s comp
• D&O
• General liability
• Business Licenses
• City and state business licenses
• Trademarks and patents
• Legal counsel
• Filing fees

We built Runway, a free budget management tool, to simplify the resource allocation process. Check it out!

Armed with this information, we hope you’ll use these common expenses as a starting point and tailor your forecast to your business.