Cost of Hiring a New Employee: What Small Businesses Really Pay

The average cost of hiring a new employee is $4,700 according to SHRM. But if you run a small business, that number is misleading. It comes from averaging in huge enterprises that have dedicated recruiting teams, bulk discounts on everything, and economies of scale you do not have.

When I hired my first few employees, I tracked every dollar. The job posting fees. The hours I spent reviewing resumes instead of running my business. The weeks of reduced productivity while the new hire got up to speed. The real number for a small business hiring a $50,000/year employee? Somewhere between $5,500 and $24,000 depending on how you recruit and how well you onboard.

That is a huge range, and the difference comes down to choices you can control. This guide breaks down exactly where hiring costs come from, which ones hit small businesses hardest, and how to reduce them without cutting corners that cost you more later.

The Real Cost for Small Businesses

Small businesses pay about 53% more per hire than enterprises. This is not because you are doing something wrong. It is because the per-hire math works against you.

A company with 10,000 employees can spread the cost of their applicant tracking system across hundreds of hires per year. You might make one or two hires annually, so that same software cost lands entirely on those few positions. The same applies to job board subscriptions, HR staff time, and nearly every other fixed cost in recruiting.

Here is what hiring actually costs for a typical 10-person company bringing on one new employee at a $50,000 salary:

The low estimate assumes you find a great candidate quickly through your network or a single job posting, and they ramp up fast. The high estimate reflects a harder search, multiple rounds of interviews, external recruiters, and a longer time to productivity. Most hires fall somewhere in between.

The Cost-Per-Hire Formula

The standard formula used by SHRM and most HR professionals looks simple, but the challenge is knowing what to include in each category.

For a small business, internal costs typically include your time reviewing resumes and conducting interviews, any staff time spent in the hiring process, whatever you pay for applicant tracking or HR software (prorated per hire), and referral bonuses if you use them.

External costs include everything you pay to outside vendors: job board fees, recruiting agency fees, background check services, skills assessments, and any candidate travel you reimburse.

But here is the problem with this formula: it completely ignores the biggest costs for small businesses. It does not capture the productivity you lose while the position sits empty. It does not account for the reduced output during the new hire's ramp-up period. And it says nothing about the cost if the hire does not work out and you have to start over.

Those hidden costs typically make up 60-70% of your true hiring expense. The visible costs everyone tracks are just 30-40% of the real total.

Direct Costs Breakdown

Direct costs are the ones that show up on invoices and receipts. They are easy to track, which is why most hiring cost discussions focus on them. But for small businesses, they are usually the smaller part of the total.

Job Board Costs

Indeed charges on a pay-per-click model, typically $0.25-$1.50 per click depending on your market and job type. LinkedIn job posts start around $300 and sponsored posts can run $1,000+ for competitive roles. ZipRecruiter packages run $249-$599 per month.

For small businesses hiring occasionally, pay-per-post often makes more sense than subscriptions. But if you are hiring multiple positions per year, a subscription can drop your per-hire cost significantly.

Recruiting Agency Fees

Agencies typically charge 15-25% of the first-year salary. For a $60,000 position, that is $9,000-$15,000. This sounds expensive, but it can make sense when you factor in your own time costs. If you would spend 40+ hours finding and screening candidates yourself, and your time is worth $75-$150/hour in the business, the agency fee might actually be cheaper.

For small businesses, agencies make the most sense for specialized roles that are hard to fill, positions where a bad hire would be very costly, or when you need someone fast and cannot afford the time to search yourself.

Background Checks and Testing

Basic background checks (criminal history, identity verification) run $30-$50. Comprehensive packages including credit history, education verification, and employment history cost $100-$150. Drug testing adds $30-$110 depending on the panel and whether it is lab-based.

Small businesses pay more per check than enterprises because they do not qualify for volume discounts. But skipping these checks to save money is risky. A bad hire costs far more than any background check.

Hidden Costs Most Calculators Miss

The costs that do not show up on invoices are the ones that hurt small businesses most. These are called soft costs or indirect costs, and they typically account for 60-70% of your true hiring expense.

Manager and Owner Time

This is the single biggest hidden cost for small businesses. When you do not have a dedicated HR person, hiring falls on you. Writing the job description, posting to job boards, reviewing resumes, conducting phone screens, scheduling interviews, interviewing candidates, checking references, negotiating offers... it adds up to 15-70 hours per hire.

At even a modest $48-50/hour valuation of your time, that is $720-$3,360 per position. And if you are the owner, the opportunity cost is probably much higher. Those are hours you are not spending on sales, customer relationships, or other work that directly generates revenue.

Vacancy Productivity Loss

Every day a position sits empty, work is not getting done. Research shows the average vacancy costs about $98 per day in lost productivity. With an average time to fill of 42-44 days, that is over $4,000 in productivity loss during the search alone. For higher-value roles, this figure can be significantly higher.

This cost is invisible because it does not show up on any statement. But it is real, and for small businesses where every person carries significant load, it can be substantial.

New Hire Ramp-Up Period

New employees operate at roughly 25% productivity in their first month, regardless of their experience level. Even great hires need time to learn your systems, your customers, and your way of doing things.

This reduced productivity period is a cost. If you are paying someone $50,000/year ($4,167/month) and they are producing at 25% for the first month, you are effectively losing $3,125 in that period alone. For roles that take 6 months to reach full productivity, the cumulative productivity loss can exceed the employee's monthly salary several times over.

Onboarding and Training Costs

Onboarding is often treated as an afterthought, something that happens between hiring and "real work." But the costs are real, and how you handle onboarding has a massive impact on whether your hiring investment pays off.

SHRM estimates a comprehensive onboarding program costs around $4,100 per employee. For small businesses without formal programs, basic onboarding typically runs $600-$1,800 when you factor in time and materials.

What Onboarding Actually Costs

• Equipment and workspace setup: $1,000-$2,000 (computer, desk, software licenses)
• IT setup and access provisioning: $50-$200 (plus IT time)
• Training time (trainer's cost): $500-$2,000 (10-40 hours at $50+/hour)
• Training time (new hire's reduced output): $2,000-$5,000 (first month)
• Buddy/mentor time: $1,000-$3,000 (20-40 hours of experienced employee time in first month). I cover how to set this up in my buddy program guide.

The question is not whether to spend on onboarding. It is whether to spend intentionally on structured onboarding that reduces future costs, or accidentally on unstructured onboarding that takes longer and produces worse results.

This is exactly why I built FirstHR. After tracking these numbers across multiple hires, I realized that the difference between good and bad onboarding was often $5,000+ per employee in productivity costs alone. A system that standardizes and streamlines onboarding pays for itself on the first hire.

I go deeper on structuring this process in my onboarding process flow guide.

The Cost of Getting It Wrong

Everything above assumes your hire works out. When it does not, you pay the full hiring cost again, plus additional costs unique to turnover.

These percentages come from Gallup and SHRM research, and they include the direct cost of rehiring plus productivity losses during vacancy, ramp-up of the replacement, and decreased productivity of remaining employees who pick up the slack.

Why Turnover Hits Small Businesses Harder

At a 50-person company, losing one employee means 2% of your workforce. Annoying, but manageable. At a 10-person company, that same departure is 10% of your team. The relative disruption is five times greater.

Small businesses also have less redundancy. When your only accountant leaves, no one can cover their work. When your only salesperson quits, deals stop progressing. The productivity loss is not just the departing employee's output. It is the ripple effect across everyone else.

I cover the full framework for keeping people around in my 30-60-90 day onboarding plan guide.

How to Reduce Your Hiring Costs

The goal is not to spend less on hiring. It is to spend smarter so each dollar produces better results. Cutting corners on critical steps often costs more in the long run.

Frequently Asked Questions

What is the average cost to hire an employee?

The commonly cited figure is $4,700 per hire (SHRM benchmark). However, this average is skewed by large enterprises with lower per-hire costs. For small businesses, realistic all-in costs range from $5,500 to $24,000 depending on the role, recruiting method, and how you measure hidden costs like manager time and productivity loss.

How do you calculate cost per hire?

The standard formula is: Cost Per Hire = (Internal Recruiting Costs + External Recruiting Costs) ÷ Total Number of Hires. Internal costs include staff time, software, and referral bonuses. External costs include job boards, agencies, and background checks. For a complete picture, add vacancy costs and new hire ramp-up productivity losses.

What is included in hiring costs?

Direct costs include job advertising, recruiting fees, background checks, and assessments. Indirect costs include manager and team time spent interviewing, productivity loss during vacancy, administrative processing, onboarding and training, and reduced productivity during the new hire ramp-up period. Indirect costs typically represent 60-70% of the true total.

How much does it cost to replace an employee?

Turnover costs range from 50% of annual salary for entry-level positions to 200%+ for senior roles. This includes the full cost of rehiring plus productivity losses during vacancy, the replacement's ramp-up period, and decreased productivity of remaining employees who cover extra work.

Is it cheaper to hire or retain employees?

Retention is almost always cheaper. Even if investing in better compensation, training, and work environment costs $5,000-$10,000 per employee annually, that is typically less than the $25,000-$75,000+ cost of replacing a mid-level employee. Focus on keeping good people rather than constantly recruiting replacements.

What is the cost of a bad hire?

Studies estimate bad hires cost $15,000-$17,000 on average, but the true cost can be much higher. You pay the full hiring cost, then pay it again when you replace them, plus productivity losses during their tenure, management time dealing with issues, and potential damage to team morale or customer relationships.

How long does it take to hire someone?

The average time to fill a position is 44-54 days according to industry benchmarks. Small businesses often move faster (2-4 weeks) due to simpler processes, but this varies significantly by role type and market conditions. Technical and senior roles typically take longer than entry-level positions.

What is the total cost of an employee beyond salary?

The SBA suggests budgeting 1.25-1.4x the base salary for total first-year employer cost. For a $50,000 salary, that means planning for $62,500-$70,000 including benefits, payroll taxes, workers comp, and onboarding costs. This does not include the one-time hiring costs discussed above.