How to Calculate the True Cost of an Employee
The salary is the headline number in a job offer — but it is not what the employee costs the business. Employer payroll taxes, insurance, retirement contributions and everyday overheads sit on top, and budgets built on salary alone run short within the first quarter.
What sits on top of salary
- Social Security and Medicare (FICA) — the employer pays 7.65% of wages (6.2% Social Security up to the annual wage base, plus 1.45% Medicare), matching what the employee pays.
- Federal unemployment (FUTA) — 6% on the first $7,000 of wages, usually reduced to an effective 0.6% when state unemployment taxes are paid on time.
- State unemployment (SUTA) — your state's rate on its wage base; new employers get a standard rate until they build a history.
- Workers' compensation — a percentage of salary that varies widely by industry risk.
- Benefits you offer — employer share of health insurance, any retirement match, paid tools, training, software and equipment.
Step by step
- Start with the annual base salary you plan to offer.
- Open the Employee Cost Calculator and enter the salary.
- Adjust the estimates to your reality — your SUTA rate, workers' comp percentage and retirement match, plus monthly health insurance and other annual costs.
- Read the total annual cost and the cost per working hour — the hourly figure is the one to use when pricing jobs and setting charge-out rates.
A quick sanity check
Even before benefits, the mandatory employer taxes (FICA 7.65% plus unemployment taxes) push the cost of a salary up by roughly 8–10%. Add health insurance and a modest retirement match and a total cost 20–40% above salary is common. That gap is why "we can afford a $50,000 hire" so often becomes a cash-flow surprise.
Frequently asked questions
Is the employee's own tax withholding part of employer cost?
No. The employee's federal income tax and their half of FICA come out of the salary itself — see the Paycheck Calculator for that side. Employer cost is everything you pay on top of the gross salary.
How do I turn annual cost into an hourly cost?
Divide the total annual cost by the hours actually worked in a year (for example 2,080 for full-time at 40 hours a week, less if you exclude holidays and leave). The calculator shows this figure directly.
Do these rates change?
Wage bases and state rates are updated periodically. Treat the calculator's defaults as sensible estimates and enter your current official rates when you have them; check once a year.
Do it now with the free tool
Skip the manual work — the Employee Cost Calculator does this task in seconds, free, in your browser.
Open the Employee Cost Calculator