Costs, Pricing and Comparisons
Employee Cost Calculator: What a New Hire Really Costs Beyond the Paycheck
Work out the true annual cost of an employee with payroll taxes, unemployment insurance, workers' comp, benefits and overhead, using a worked example and checklist.
An employee typically costs 1.15 to 1.40 times their wages once you add employer payroll taxes, unemployment insurance, workers' compensation, benefits and overhead. For a $22-an-hour full-time hire the wage is $45,760 a year, but a realistic total in the illustrative example below is about $55,600, roughly 22% more. Knowing this number before you hire tells you how much extra revenue the position must generate, and it keeps you from underpricing your work or running short of cash.
The building blocks of employee cost
1. Wages
Start with the base: hourly rate x paid hours. A full-time year is usually 2,080 paid hours (40 hours x 52 weeks), which includes paid holidays and vacation if you offer them. Non-exempt employees must be paid overtime at one and a half times their regular rate for hours over 40 in a workweek under the federal Fair Labor Standards Act, and some states set stricter rules. Whether a position can be treated as exempt depends on duties and pay level, not on job title, so check the Department of Labor guidance.
2. Employer payroll taxes
- Social Security: the employer pays 6.2% of each employee's wages up to the annual wage base set each year by the Social Security Administration.
- Medicare: the employer pays 1.45% on all wages, with no cap.
- Together, the employer share of FICA is 7.65% for most employees under the wage base.
- Federal unemployment tax (FUTA): the statutory rate is 6.0% on the first $7,000 of each employee's wages, but most employers receive a credit of up to 5.4% for paying state unemployment tax on time, which brings the effective rate to 0.6%, or $42 per employee per year. Some states have credit reductions, so check the IRS instructions for Form 940.
- State unemployment tax (SUTA): the rate and wage base vary by state and by your experience rating. New employers usually get a standard new-employer rate. Check your state workforce agency.
3. Workers' compensation insurance
Most states require employers to carry workers' compensation insurance, with rules differing by state and by number of employees. Premiums are based on payroll and the risk class of the work, so an office worker costs much less to insure than a roofer. Ask your insurance agent for the rate per $100 of payroll for the class codes that apply to you.
4. Benefits
Benefits are not always required, but many employers offer them to compete for staff. Costs may include:
- Employer share of health insurance premiums, if you offer coverage. The Affordable Care Act imposes an employer mandate on applicable large employers, generally those with 50 or more full-time equivalent employees, and small employers may have tax credit options through the SHOP marketplace.
- Retirement plan matching or administration fees.
- Paid time off beyond holidays, parental leave and state-required paid sick leave, which many states mandate.
5. Overhead for the position
Equipment, software licenses, phone, training, uniforms, recruiting, payroll service fees and the manager's time all belong in the total. Many owners forget these because they do not appear on a paystub.
Worked example (illustrative numbers)
A full-time employee at $22 per hour, 2,080 hours a year, in a state with a 2.7% unemployment rate on the first $9,000 of wages:
| Cost item | Calculation | Annual amount |
|---|---|---|
| Wages | $22 x 2,080 | $45,760 |
| Social Security and Medicare (employer) | 7.65% x $45,760 | $3,501 |
| FUTA | 0.6% x $7,000 | $42 |
| State unemployment | 2.7% x $9,000 | $243 |
| Workers' compensation | 1.5% of payroll (illustrative) | $686 |
| Health insurance, employer share | $300 x 12 (illustrative) | $3,600 |
| Software, equipment, payroll service | Illustrative | $1,800 |
| Total | $55,632 |
The total is 1.216 times the wage. If the employee has 10 paid holidays and 10 vacation days (160 hours), productive hours are 1,920, so the cost per productive hour is $55,632 / 1,920 = $28.98, not $22. That is the figure to compare against what customers pay for the employee's time.
What the hire must produce
If you hire to serve customers, the employee must earn enough gross margin to cover their total cost. At a 45% gross margin on the work they support, the position needs revenue of about $55,632 / 0.45 = $123,627 a year, or around $10,300 per month, to pay for itself before any profit. If your current sales cannot realistically grow by that much, the hire may be premature, and part-time staff, a contractor or automation might fit better. See the 1099 vs W-2 cost guide for that comparison.
Cash flow effects
Payroll is paid on schedule whether or not customers pay you on time. Run the new monthly cost through the cash runway guide: a $4,636 monthly cost (the $55,632 divided by 12) added to your burn rate shortens runway if revenue does not increase quickly. Also plan for the hiring lag: recruiting, onboarding and training mean the employee costs money for weeks before they are fully productive.
Hidden costs worth checking
- Overtime if the role could exceed 40 hours.
- Turnover: replacing an employee has recruiting and training costs.
- Payroll mistakes: misclassifying workers or missing deposits can lead to penalties. The IRS publishes deposit rules in Publication 15.
- State and local taxes, such as paid family leave contributions or local payroll taxes, which vary.
- Required paperwork: Form I-9 for employment eligibility, Form W-4 for withholding and state new-hire reporting.
Checklist before making a hire
- Confirm the work is steady enough for an employee.
- Get your state's unemployment tax rate and workers' compensation quote.
- Decide on benefits and price them.
- Register for payroll accounts: an Employer Identification Number, state tax accounts and a payroll service if you want one.
- Run the employee through the break-even calculation.
- Keep three months of the new cost in reserve.
When to consult a professional
Employee classification, overtime exemptions, benefits rules and multi-state payroll have real legal and tax consequences. A payroll provider, CPA or employment attorney can confirm which rules apply to you.
Frequently asked questions
What is the rule of thumb for employee cost?
Many owners budget 1.2 to 1.4 times wages. Your number can be lower or higher depending on benefits, state rules and risk class.
Do I pay Social Security tax on all wages?
You pay the employer Social Security share only up to that year's wage base. Medicare applies to all wages. Check the Social Security Administration for the current base.
Is part-time cheaper per hour?
Often the payroll taxes are proportional, but fixed costs such as equipment, software and onboarding are spread over fewer hours, so cost per hour may be higher.
Do I have to offer health insurance?
Only applicable large employers face the federal employer mandate. Small employers may offer coverage by choice or because of local competition for workers, and some states have their own requirements.
Sources
- Internal Revenue Service — employment taxes, Publication 15 and Form 940 instructions
- U.S. Department of Labor — wage and hour rules and overtime guidance
- Social Security Administration — current Social Security wage base
- HealthCare.gov — information on small business health coverage options
