Can I Afford to Hire an Employee? Here's How to Know
There's a moment a lot of growing business owners hit where they're turning down work, dropping balls, or just completely burnt out, and the obvious answer feels like hiring someone. But then the next thought arrives almost immediately: can I actually afford this?
Without clear numbers in front of you, that question has no good answer. It just sits there, making you anxious.
The question of, "Can I afford to hire an employee" is a math problem, not a gut feeling. And if your books are in order, you already have most of the information you need to answer it.
Why This Decision Feels So Hard
Hiring feels risky because it's a fixed commitment. A new client can end. A software subscription can be cancelled. But payroll shows up every two weeks regardless of whether it was a good month.
That's a real consideration. But most business owners stay stuck on this decision longer than they should because they don't have a clear enough picture of their finances to know whether the risk is reasonable.
If you don't know your actual monthly expenses, your true profit margin, or how consistent your revenue really is, hiring someone feels like a leap of faith. Get those numbers clear and it becomes a much more manageable decision.
Step One: Know What an Employee Actually Costs
The salary or hourly rate is only part of the picture. When you hire an employee as opposed to a contractor, the real cost is meaningfully higher than what shows up on their paycheck.
On top of wages, you're typically looking at payroll taxes (the employer's share of Social Security and Medicare runs about 7.65% of wages), workers' compensation insurance, unemployment insurance, and any benefits you offer like health insurance, paid time off, or retirement contributions.
As a general rule, the true cost of an employee is roughly 1.25 to 1.4 times their base salary. So if you're planning to pay someone $50,000 a year, budget for $62,000 to $70,000 in total employment costs. If you're paying hourly, apply the same multiplier to get a realistic number.
Step Two: Look at Your Revenue and Profit Over the Last Six to Twelve Months
Pull up your profit and loss statement and look at a few things.
How consistent is your revenue?
A business bringing in $15,000 a month reliably is in a very different position from one that made $25,000 in March and $8,000 in April. Consistent revenue makes payroll manageable. Variable revenue can make it stressful.
What is your actual profit margin?
After all expenses, including paying yourself, what's left? If your margins are thin, adding a fixed cost like payroll will compress them further. If you have real room in your numbers, that's a different conversation.
What does your cash flow look like?
Profit on paper doesn't always mean cash in the bank. If your clients pay on net-30 or net-60 terms, you could be profitable but cash-strapped at the wrong moment. Cash flow tells you whether you can actually cover payroll when it's due, not just whether the business is technically making money.
If any of these numbers are unclear or you're not sure they're right, that's worth addressing before you make a hiring decision so that you can make the call with accurate information.
Step Three: Figure Out What the Hire Needs to Generate
The hire needs to pay for itself. That doesn't always mean the person you're bringing on is directly revenue-generating. If you're hiring an admin assistant, they're not signing new clients. But their work should free you up to bring in more revenue than the hire costs.
Here's a simple way to think about it. If the total cost of your new hire is $4,000 a month, ask yourself: will having this person allow me to bring in at least $4,000 more per month than I currently do?
That might mean you’re able to take on two more clients because you're no longer buried in admin work. It might mean finally launching the offer you've been putting off because you haven't had the capacity.
If the answer is yes, the hire is likely worth it. If you're not sure, that's worth thinking through before you commit.
Step Four: Know Your Financial Runway
Before you bring on a new hire, you want to know how long you could cover their costs if your revenue dipped.
A good benchmark is having enough cash reserves to cover at least two to three months of the new hire's total cost, on top of your existing operating expenses. That cushion gives you room to absorb a slow month, a client who leaves, or an unexpected expense without payroll becoming a crisis.
If you don't currently have that cushion, that doesn't automatically mean you can't hire. It does mean thinking carefully about timing, or considering whether bringing on a part-time contractor first might be a lower-risk way to test the waters.
Choosing an Employee vs. a Contractor
Not every hire needs to be an employee. For a lot of small businesses, especially in the early stages, bringing on a contractor first makes more sense.
Contractors cost more per hour than employees doing the same work, but they come without payroll taxes, benefits, or the administrative overhead of being an employer. If your workload is variable or you're not ready for a full-time commitment, a contractor relationship gives you flexibility while you figure out whether a permanent hire actually makes sense.
The distinction also matters for tax and legal reasons. You can't simply call someone a contractor to avoid the costs of employment if the working relationship looks like employment. If you're not sure how to classify the role you're thinking about, it's worth a conversation with your CPA before you move forward.
What Your Books Need to Look Like Before You Hire
Making a confident hiring decision requires trusting your numbers. That means your income and expenses are tracked accurately, your accounts are reconciled, and your profit and loss statement reflects what's actually happening in your business.
If your books are behind, inconsistently categorized, or you're not quite sure they're right, you're making this decision without the full picture. That's not a comfortable place to be when you're about to take on a fixed monthly commitment.
Hiring is one of the most meaningful steps a growing business can take. It's also one of the decisions that deserves real numbers behind it, not just optimism and a rough estimate.
If you want to look at your actual financials and work through what hiring would look like for your business, book a free discovery call to learn how I can support you.
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