How to Determine the True Cost of an Employee

Employee cost is more than just the sum of each new employee’s base salary. For instance, if an employee’s base salary is $50,000, that employee will actually cost you around $62,500-$70,000.?

The actual cost of employee remuneration is the sum of their total compensation, benefits package, taxes, and other overhead expenses. Learning how to determine the cost per employee can help business owners make smarter hiring decisions, but there are other factors to consider.?

How to determine employee cost

When determining employee cost, you’ll find that it comes out to about 1.25 to 1.4 times the team member’s salary.

According to 2021 data from the Bureau of Labor, the salary costs for private industry team members were an average of $26.86 per hour worked. Benefit costs came out to an average of about $11.22.

When you bring on a new employee, you need to know the total cost you will be paying to get them on board. From worker’s compensation to medicare taxes, there is a lot to consider.

Let’s break down each aspect of employee cost to simplify this process.

Pre-employment costs?

• Employee recruitment and hiring: posting the position on job boards, background checks, and administrative time for interviews.?
• Onboarding and training: new software and equipment like computers, keyboards, and office equipment. Field service teams might have to pay for new uniforms, hardware, or protective gear.

Wages

The primary budget item employers factor into employee cost is base salary. In 2020, the national average wage for someone in the United States was $55,628.

Let’s look at some factors that you should be factoring into employee wages.?

• Overtime: Hourly and non-exempt employees are eligible for overtime when they work more than their allotted hours.?
• Bonuses and promotions: annual wage increases, bonuses, and promotions when assessing total employee cost. Plus, irregular increases like equipment or holiday bonuses.
• Benefits: retirement plans, health care, and paid time off.?
• Retirement: According to the Bureau of Labor Statistics, 67% of companies offer a 401k retirement plan with an average match of 3.5% of team members’ salaries.??
• PTO: Per the Family and Medical Leave Act (FMLA), employers are required to provide up to 12 weeks of unpaid, job-protected medical and family leave each year. After one year of employment, over one–third of private industry team members will receive 10-14 days of paid time off.
• Health care: Under the Affordable Care Act (ACA), business owners must offer health insurance to employees who work full-time hours. Small businesses may be exempt from this rule if they have less than 50 team members.?

Taxes and insurance

How much do taxes cost employers? The IRS offers this extensive Employer’s Tax Guide. If you’re not up for reading a 50-page document on taxes, we’ll summarize it for you.?

• FICA: FICA (Federal Insurance Contributions Act) is a mandatory payroll deduction covering Social Security and Medicare. Employers are required to cover 6.2% for Social Security and 1.4% for Medicare.?
• FUTA: The Federal Unemployment Tax Act (FUTA) requires employers to provide payments for unemployed people. Companies pay 6% on the first $7,000 earned by each team member. However, some employers receive a 5.4% FUTA tax credit, so their total payment is 0.6%.?
• SUTA: State unemployment tax (SUTA) and State Unemployment Insurance (SUI) costs depend on the state. Most SUTA tax ranges between 2.7% and 3.4%. To learn more, check out this website.
• Worker’s Compensation: Worker’s Compensation insurance covers employers who are injured on the job. Employers are charged a percentage on each $100 of an employee’s salary. The cost per $100 of covered wages depends on the state and your industry, and ranges from $0.51 to $2.27 per $100.?

Additional Insurance?

On top of health insurance, there are a few other optional insurance fees that employers may need to factor into their budget.?

• Dental Insurance
• Life Insurance
• Professional liability coverage

Dental and Life insurance policies are optional, but you’ll probably need to add them to your employee benefits package to compete with other employers. Professional liability insurance is another optional layer of protection corporations offer.

How to calculate employee cost

We’ve been throwing a lot of numbers and percentages around, so you’re probably wondering how this all adds up. Here is an example that employers can use to estimate employee costs.

For this example, we’ll be using the average wage for a U.S. worker in the state of Ohio. We’ll also assume that their employer offers average retirement and healthcare contributions.

Employee base salary = $55,628.60

Retirement (2.5% of salary) = $1,390.70

Health care (average cost in Ohio) = $201.00

FICA (7.6% of base salary) = $4,227.70

FUTA (6% of first $7,000) = $420.00

SUTA (2.7% of base salary) = $1,501.90

Worker’s compensation ($0.74 for each $100 of base salary) = $411.60

Total employee cost = $63,781.50

You can try this employee cost calculator to find your own employee cost. Once you have established your employee cost, it can also be helpful to determine your labor cost percentage.?

This percentage will vary depending on your industry. Ideally, your labor cost percentage should be 20%-35% of your gross sales.

Variables for employee cost

Now that you’ve got an idea of your total employee cost, let’s look at some of the variables that may impact this cost.?

• Location: Tax rates will depend on the state where your business or your employee is located in. Similarly, income varies depending on the cost of living in the area your employee or business is located.
• Industry: Employee pay and benefits vary by industry, so you will need to match what your competitors offer if you want to retain employees. The industries with the highest corporate taxes are the advertising, aerospace, and apparel industries.?
• Remote teams: Remote teams cost less overall compared to in-office teams. Some of the expenses you need to consider for in-office employees include rent, utilities, and supplies.?

If your business requires an in-office presence, these are some of the expenses you can expect.?

• Office space: renting office space is one of the biggest expenses for an on-site workforce. As teams grow, this expense will only increase as more office space is needed.?
• Utilities: Along with the cost of rent, heating, cooling, and lighting your office space will also add to your overall cost per employee. The more team members you have, the higher your utility cost.?
• Supplies: As a business owner, you will need to provide office supplies and tools for your employees. This could be anything from pens and post-it notes to keyboards and space heaters.?

On the other hand, remote work comes with some costs to employers. Fortunately, many of them are optional.?

Remote employers can calculate the cost of supplying software, devices, and even flying employees out to events in their employee cost budget.?

Hidden employee costs

There are several employee cost factors that business owners might not realize are hurting them in the long run.

Many of these factors are necessary, but budgeting for them can help you anticipate any surprise additions to your budget.

• Meetings: Employees have reported spending 550 to 750 hours in meetings every year. While not all meetings require you to pay for flights, all that time can hurt productivity.? Establishing policies like no meeting days can help employees increase their productivity and manage their time better. Still, lack of communication can lead to wasted time and re-doing work.
• Continued education and training: In 2020, businesses spent between $581-$1,678 per employee on ongoing education and training. Investing in your employees is always the right thing to do, but be conscious of this expense when budgeting employee costs.
• Socialization: Retreats, coffee hours, and team lunches are great for morale. Still, you need to budget for these moments of team camaraderie. For example, an employee retreat is about $700/night for each team member. To save money, you can get creative and hold virtual retreats.?

How understanding employee costs can cut down on expenses

As a business owner, knowing your cost per employee is vital. Bringing this cost down can help your bottom line. You should work this number into your budget and ensure that costs don’t sneak up on you.?

Do you have any tips for calculating employee cost that you didn’t see in our guide? Leave us a comment below.