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The Mandatory Benefits That All Employers Must Pay
6/26/2006
by Geri Puleo, G.A. Puleo & Associates
What is an employee benefit? A benefit is a form of indirect compensation received by the employee as a result of his or her membership in your organization. It is something in addition to their wage or salary. Workers often think of health insurance and paid vacations as a benefit (the type of benefit that small business owners may be unable to provide in the early stages of a company’s growth).
But that doesn’t mean that the only payment that you are responsible for providing to employees is a salary or hourly wage. In fact, every business owner who hires employees is required to provide three mandated benefits:
- Social Security/Medicare
- Unemployment Insurance
- Workers’ Compensation
Although these mandated benefits are not considered to be as strong of a recruitment and retention tool as the voluntary benefits such as health insurance, life insurance or tuition reimbursement, failure to provide them can result in significant liability for you and your company.
Note: This article is meant to provide a general overview of these three mandatory benefits, It does NOT represent legal advice nor is it comprehensive or specific to your unique business situation; however, it can be used to provide rudimentary direction for future conversations with your legal counsel.
Social Security/Medicare
Social Security and Medicare are Federally mandated and administered benefits. The cost of contributing to an employee’s Social Security and Medicare is shared equally by both the employer and the employee.
- The current Social Security tax rate for 2006 is a total of 12.4%, of which half (6.2%) is paid by both employer and employee.
- The maximum wage base triggering the Social Security tax is $94,200. If an employee earns over this amount, the excess is not taxed.
- The Medicare tax rate for 2006 is a total of 2.9%, of which half (1.45%) is paid by both employer and employee.
- Unlike the Social Security tax, the Medicare tax does NOT have a wage base limit. All earnings are subject to this tax.
Whether you agree or disagree with the current Social Security system is irrelevant: if you have employees, you are required to contribute to this benefit. For more information, visit www.ssa.gov.
Unemployment Insurance
Unemployment insurance is a combined Federal and State program that was started during the Great Depression, and whose legislative origins are found in the Social Security Act of 1935. New employers in Pennsylvania must register with the Department of Labor & Industry within 30 days of the date in which covered employment is first provided. In other words, registration should coincide with the hiring and start date of your employee.
Like Social Security and Medicare, unemployment insurance is jointly paid for by both the employer and employee. Although, the employer pays a significantly higher percentage tax, there is a wage base limit that is not used in calculating the employee’s contribution.
- New employers who are not in the construction industry pay a newly liable rate of $3.7520% in 2006 on the first $8,000 of wages (the wage base limit) paid to each employee per taxable year (approximately $300).
- New employers who are in the construction industry pay a newly liable rate of 10.3984% in 2006 on the first $8,000 of wages paid to each employee per taxable year (approximately $830).
- Employee contribution to unemployment insurance is 0.09% in 2006 AND is based on the individual’s total (gross) wages – there is NO wage base limit in effect for the employee’s contribution.
These rates will apply to the employer for the first two or three calendar years in which wages are paid to employees. A computed or standard rate may be triggered if the company is deemed to have sufficient experience. For more information on Pennsylvania unemployment insurance, visit www.dli.state.pa.us.
Workers’ Compensation
Workers’ compensation provides medical treatment, vocational rehabilitation, wage-loss indemnification and death/burial benefits to victims (or their surviving dependents) of industrial accidents and occupational disease. In the vast majority of states, employers are solely liable for payment of the workers’ compensation premiums. Workers compensation must be paid even if you have only one employee AND that employee is a family member.
- Employers pay a workers’ compensation premium on each $100 of payroll, not on an individual employee’s compensation.
- While percentage rates are readily available for Social Security, Medicare and unemployment insurance, the employer’s annual workers’ compensation premium is based on a complex system of classifications and experience ratings that vary by state.
- Employers in Pennsylvania can purchase a workers’ compensation policy through the State Workers’ Insurance Fund (SWIF), an insurance company licensed to conduct business in Pennsylvania, or self-insuring.
Remember, according to the Pennsylvania Labor and Industry website: “If you employ workers in Pennsylvania, you must have workers’ compensation insurance – it’s the law.” For more information on Pennsylvania workers’ compensation, visit www.dli.state.pa.us.
The Effect of Benefits on Compensation
Your contribution as a Pennsylvanian employer to employees’ Social Security (6.2%), Medicare (1.45%) and unemployment compensation (3.7520% on each employee’s first $8,000 for new non-construction employers) will add a minimum of 11.402% on the first $8,000 of each employee’s wages. (Due to the complex criteria that contribute to an employer’s workers’ compensation premium that is calculated per each $100 of payroll, this mandatory benefit has NOT been included in these figures.)
Based on the current minimum wage of $5.15 per hour for covered nonexempt employees under the Fair Labor Standards Act (see www.dol.gov/elaws), you will now be paying at least $5.74 per hour plus workers’ compensation premiums. Sadly, because these additional employer contributions are mandated, employees often dismiss them.
Therefore, you need to also consider a variety of voluntary benefits that can enhance your recruitment and retention efforts. Because these are optional benefits, you have greater discretion in deciding what to offer. Chambers of commerce and other professional organizations often offer reduced group rates for health, vision, dental and life insurance to their members. Flexible work schedules generally cost little and can greatly contribute to employee retention. Respecting and recognizing employee contributions, although ‘free,’ are often a deciding factor in whether a job candidate will accept your offer of employment – and whether he or she will stay with your organization. Just be sure to align your benefits strategy with your overall corporate strategy.
Whatever your total benefit package, it will contain a combination of voluntary and mandatory benefits – while the voluntary benefits are optional, NEVER avoid paying the mandatory benefits. Good luck!
About the Author:
Geri Puleo is the principal and founder of G. A. Puleo & Associates, a training and consulting firm that coaches corporations and individuals to maximize their performance through strategic change. In addition to over 25 years of entrepreneurial experience, Ms. Puleo is certified as a Senior Professional in Human Resources (HR’s highest national certification), holds an M.A. in Human Resources Management, an MBA and is pursuing a Ph.D. in Leadership and Change Management. A founding member and past president of Tri-State SHRM (a local chapter of the Society for Human Resources Management), she is also a voting member of the Pennsylvania State Leadership Council. In addition to her role as an adjunct business professor at the Pennsylvania State University and Seton Hill University, Ms. Puleo is a frequent speaker at a variety of regional organizations’ professional development workshops. Ms. Puleo creates all the company’s customized, results-driven workshops and training interventions. She can be reached at geri@gapuleo.com OR 412/722-1020.
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