(And Your Team’s Too)

It’s the classic small business tug-of-war, only in this game, the rope is your payroll budget:

“Should I give my employees a raise or better benefits?”

Sounds like a no-brainer, right? People love more money. Cash is king. Everyone wants to see bigger numbers on their paycheck.

But here’s the thing:

From a cost perspective, giving someone a raise is often the least efficient way to make them happy. Especially when you compare it to offering better benefits.

And yes, I’m about to get into math here. But stay with me. These are numbers you actually enjoy more than your high school algebra class.

Why This Conversation Matters for Small Businesses

If you’re a small business owner with 2–15 employees, you know that every dollar matters. Raises aren’t just “a few bucks extra” in payroll. They snowball. And they don’t always buy you loyalty.

Benefits, on the other hand, can feel like a raise to your team, cost you less, and give you a competitive edge in hiring and retention.

Let’s break down why.

Point 1: The Hidden Cost of Giving a Raise

Let’s say you run a company with 10 employees and you’re thinking, “Hey, I’ll give everyone a $5,000 raise. That’s fair.”

Here’s what that actually costs you:

$5,000 × 10 employees = $50,000 base raise
Add payroll taxes (~7.65% for Social Security and Medicare): $3,825
Add any 401(k) match or benefit costs tied to salary: let’s say 3% match = $1,500

Total new annual cost: $55,325

And here’s the kicker—your employees won’t actually take home $5,000 more.

Because income taxes will shave that down. For someone in a 22% federal tax bracket and ~7% state/local, they’re only pocketing around $3,500.

You’re spending over $5,500 per employee for them to feel like they got $3,500. That’s not exactly a stellar ROI.

Point 2: Benefits Are Tax-Friendly (For Both Sides)

Now let’s imagine you take that same $5,000 budget per person and use it to enhance benefits instead.

The IRS, in a rare moment of generosity, doesn’t tax most employee benefits. Mostly. Things like health insurance, dental, vision, disability coverage, and even some wellness perks can be included.

So if you put $5,000 worth of benefits into someone’s compensation package, here’s what happens:

You don’t pay payroll tax on that amount.
They don’t pay income tax on it.

That $5,000 is a real $5,000 in value to them. Not $3,500 after taxes.

And if you negotiate or structure benefits smartly (hi, that’s literally my job 😁), you can often deliver more value than what it costs you.

Example:
Group health plan contribution worth $5,000 per employee → due to pooled risk and tax treatment, it might only cost your business $4,200.

Compare that to the $5,500+ cost of a raise… and you start to see why benefits win.

Point 3: The “Perceived Value” Multiplier

Here’s the sneaky part most owners overlook: employees often value benefits more than the raw dollar amount.

If you hand someone an extra $300/month in take-home pay, they’ll notice for about… two weeks. Then it’s just “normal.”

But if you pay their $300/month health insurance premium, they’ll feel that every time they go to the doctor and don’t get slammed with a bill.

Let’s put it in real terms for our 10-person company:

Scenario A Raise:

Cost to you: $55,325/year
Net value to them: ~$35,000 after taxes total for all employees
Long-term loyalty boost: Meh, maybe a few months.

Scenario B Better Benefits:

Cost to you: $42,000/year
Value to them: $50,000+ tax-free in real coverage and perks
Long-term loyalty boost: Much higher, because benefits tie directly to security, health, and peace of mind.

You save $13,325 compared to raises, and your employees feel richer.

A Real-Life Example: 10-Person Company

Let’s build a side-by-side so you can see the math clearly.

*Perceived Value Score = totally unscientific but based on how much your employees gush about it at lunch.

Bonus: Benefits Are Harder to Poach

Raises are portable. Your competitor can offer $3,000 more and lure someone away.

Benefits, especially good, custom-fit ones, are sticky. If you’ve set up coverage that truly works for them and their family, it’s harder to leave.

Think of it like dating: sure, someone can buy them a nice dinner. But you’re the one who knows how they like their coffee, remembers their dog’s name, and set up a sweet vacation fund. That’s harder to walk away from.

The Insured AF Bottom Line

Benefits aren’t just a nice add-on they’re a strategic play.

When you run the numbers for a 10-person team, better benefits can save you thousands compared to raises while delivering more value to your employees.

And in a small business, loyalty and retention aren’t just nice. They’re survival.

📌 TL;DR — Benefits Beat Raises (Most of the Time)

Raises cost more than you think once you add payroll taxes and benefits tied to salary.
A $5,000 raise might only put $3,500 in your employee’s pocket after taxes.
Benefits are tax-free for both sides, so $5,000 in perks = $5,000 in value to them.
For a 10-person company, better benefits can save $13K+ vs. giving raises, while delivering more perceived value.
Benefits stick. Raises are easy for competitors to beat.
If you want to keep your team happy, healthy, and harder to poach, without wrecking your budget, benefits win.

💬 Let’s run your numbers and see if your payroll budget is working as hard as you are.
👉 Book a free call

Benefits vs. Raise: Why Perks Beat Paychecks for Your Bottom Line