How Much to Pay Your Employees: A Step-By-Step Guide

Rieva Lesonsky

Rieva Lesonsky

Contributor at Fundera
Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.
Rieva Lesonsky

How much to pay your employees? It’s a question most small business owners struggle with, especially those who don’t have a dedicated human resources function or who are hiring for the first time. But what to pay employees is an important question—according to a recent study by Glassdoor, 67% of job seekers consider salary to be a top factor in considering whether or not to take a job.

You want to hire and retain top talent, but you also need to create a small business budget that allows your business to turn a profit and grow. So figuring out how much to pay your employees is almost like a balancing act. Fortunately, we are here to help you walk that high wire. Here is everything you need to consider in order to pay employees appropriately while staying within your operating budget.

How Much to Pay Your Employees: Factors to Consider

There are a myriad of factors to consider when you ask yourself “how much should I pay my employees?” We’re going to go through all of them so that you can accurately account for labor costs when determining your business’s operating expenses. One guiding principal to keep in mind is that a salary is an investment—so make sure you never pay more than you feel you will get in return.

1. Type of Job

The first thing you must do when determining what to pay your employees is write an accurate job description. This includes the core duties of the job, skills needed, and level of experience required. You want your job description to be detailed enough that applicants can understand what they are applying for, but generic enough that it can be compared to a similar job in your industry.

Note that job titles may not be accurate indicators of pay ranges; what a marketing director does, for example, can vary wildly from company to company or industry to industry. Writing a job description will help you make sure you’re comparing apples to apples when you research average pay (see Step 2).

what to pay employees

2. Average Pay

The next factor to consider when trying to figure out what to pay employees is what the average salary for comparable roles in your industry is. There are a few different methods you can use to find out this information. The first is to perform internet research. The Bureau of Labor Statistics has a page in which they detail average pay rates for different industries and different regions. Websites like PayScale, Glassdoor, Salary.com, and LinkedIn also publish reports on salary data. We also recommend using keywords from your job description to get as specific as possible. For example, find out what the going rate is for key skills like bookkeeping or data research.

You also need to factor in the geographic location of your job to get an accurate idea of what to pay employees. Average pay for the same job can vary depending on the cost of living in certain locations or whether there are too few, or too many, qualified employees in the area. We recommend talking to other businesses and recruitment firms in your area to get a better understanding of the local market for the role you’re hiring for.

While your researching average pay, look for low, average and high pay rates for a job, and create a pay range you feel comfortable with. This gives you the flexibility to offer candidates with more experience or skills higher wages—if you think they are worth the investment.

3. Exempt vs. Nonexempt Employees

When considering how much to pay your employees, it also helps to know the difference between exempt and nonexempt employees. The Fair Labor Standards Act (FLSA), the federal law that regulates employment policies, recognizes two types of employees. Exempt employees are not subject to minimum wage or overtime pay laws; they must be paid a salary—a set amount of pay no matter how many or few hours they work. Nonexempt employees are entitled to minimum wage and overtime pay. They’re typically paid hourly, but some are paid salaries. For more information on determining if an employee is exempt or nonexempt, see this Department of Labor fact sheet.

Generally speaking, the FLSA recognizes three main categories of exempt workers: Administrative, professional, and executive. These three categories are purposefully broad. Most other categories of employee can be considered nonexempt, although not all are.

4. Labor Laws

Exempt vs. nonexempt employees is only one part of labor law employers must comply with when determining how much to pay employees. The FLSA also sets specific minimum wage and overtime pay standards. Many states also set their own minimum wages—and employees are entitled to the higher of the two minimum wages. New York, for example, currently has a minimum wage of $11.80, while Florida has a minimum wage of $8.46. The federal minimum wage is $7.25 per hour, meaning no state can pay less than $7.25 for a minimum wage job. The Department of Labor website has more information about minimum wage laws in each state:

  • For nonexempt employees, overtime pay at a minimum of one and one-half times the regular rate of pay is required after 40 hours of work in one workweek. The Department of Labor’s Wage and Hours division has tools you can use to calculate hours worked and overtime. (Some states, notably California, require overtime to kick in at more than 8 hours worked in a day).
  • If you want to pay employees, such as employees making craft items or garments, on a piece-rate basis, you can do so as long as the piece rate is at least equal to the minimum hourly wage rate (and overtime, if employees work more than 40 hours per workweek).
  • If your employees regularly collect more than $30 a month in tips, such as bartenders, waitresses or hairdressers, you can count tips as part of their wages, but you have to pay a wage of at least $2.13 per hour and meet some other requirements in order claim a tip credit. (See this fact sheet for more information.)

5. Fringe Benefits

When considering how much to pay your employees, don’t forget to factor in the fringe benefits you offer. The IRS defines fringe benefits as “a form of pay (including property, services, cash, or cash equivalent) in addition to stated pay for the performance of services.” This can include anything from social security and workers’ compensation to health insurance and paid time off.

While it’s easy to think of a salary as the cost of employment, it’s essential you consider the cost of providing fringe benefits when trying to determine how much to pay your employees—lest you end up paying more in salary than what you had budgeted for. If you offer employee benefits such as health insurance, life insurance or a retirement plan, take the costs of providing these benefits into account. Their cost can equal 20 or 30 percent of an employee’s salary or wages.

Also note that, oftentimes, offering good fringe benefits is just as important as paying a fair salary. A Randstad survey revealed that 55% of employees left a job because they found better benefits elsewhere.

6. Candidate’s Pay Expectations

Of course, the candidate should also have some say in how much they get paid. This is why it is important to enter salary negotiations with a range in mind. For a candidate who meets the essential qualifications of the role, you may want to offer them a salary in the lower to medium range of the average salary for the job. For a candidate who exceeds expectations, you may try and entice them by offering a salary in the higher range.

Note that when negotiating salary, you want to keep in mind what you think your ROI would be. If you offer a highly qualified candidate a higher range salary, do you feel they will deliver enough value to make your investment in them worthwhile? This is often one of the hardest questions to answer when figuring out how much to pay your employees, and it underscores the importance of doing your homework before making an offer.

7. Budget

Obviously, when figuring out what to pay your employees, you need to have a good understanding of what you can afford. We already touched on the cost of fringe benefits and salary ROI. Here are some other factors to consider:

  • How much time can that employee save you, and what is that worth to you?
  • If this employee is being hired for a more senior role, can they increase the ROI of other employees?
  • Can you afford to give this employee a raise if and when they ask for it?
  • What is the cost of onboarding this employee, both in terms of money and time?

Answering these questions can give you a better understanding of whether or not you can afford to hire a certain candidate.

what to pay employees

How Much to Pay Your Employees: The Bottom Line

When it comes to the question of “how much to pay your employees,” hopefully now you have a better idea of where to start. Do research, learn about labor law compliance, and work out your budget. If you have any questions or concerns, run your plans by an accountant or attorney familiar with tax issues and employment laws. Remember that you’re not just assigning a number to a job, you’re hiring a person. So while you want to keep your business’s interests in mind, you should also be fair and reasonable with your employees. After all, they are the ones who are going to help your business grow.

Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone. They haven’t been reviewed, approved, or otherwise endorsed by any of the companies mentioned above. Learn more about our editorial process and how we make money here.
Rieva Lesonsky

Rieva Lesonsky

Contributor at Fundera
Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.
Rieva Lesonsky

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