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Do the Math | Employee Cost

Do the Math | Employee Cost

April 3, 2025 General No Comments

To determine employee cost, you need to account for more than just their wages.

The total cost includes their salary or hourly wages, benefits, taxes, and any additional overhead or resources tied to their employment.

Here’s a step-by-step breakdown:

  1. Base Wages or Salary: Start with the employee’s gross pay. If they’re hourly, multiply their hourly wage by the number of hours worked in a given period (e.g., per week, month, or year). For salaried employees, use their annual salary or divide it by the pay periods.
    • Example: An employee earns $20/hour and works 40 hours/week. Weekly wage = $20 × 40 = $800.
  2. Overtime Pay: If applicable, factor in overtime. In many places, overtime is 1.5x or 2x the regular rate for hours worked beyond a standard threshold (e.g., 40 hours/week in the U.S.).
    • Example: 5 overtime hours at $20 × 1.5 = $30/hour = $150 extra.
  3. Employer-Paid Taxes: Add payroll taxes you’re responsible for as an employer. In the U.S., this includes Social Security (6.2% of wages up to a cap), Medicare (1.45%), and federal/state unemployment taxes (rates vary, often around 0.6%-6% depending on location and experience rating).
    • Example: For $800 in wages, Social Security = $49.60, Medicare = $11.60, Unemployment (assume 2%) = $16. Total = $77.20.
  4. Benefits Costs: Include the cost of benefits you provide, such as health insurance, retirement contributions (e.g., 401(k) matching), paid time off (PTO), and other perks. These vary widely by company and employee.
    • Example: Health insurance might cost $500/month per employee, 401(k) match at 3% of $800 = $24, and 2 weeks PTO annually prorated to a week = $800. Total weekly estimate = $500 ÷ 4 + $24 + $800 ÷ 52 = $125 + $24 + $15.38 ≈ $164.38.
  5. Workers’ Compensation and Insurance: Factor in premiums for workers’ comp (varies by industry and risk, e.g., 1-5% of wages) and any liability insurance tied to employment.
    • Example: 2% of $800 = $16.
  6. Equipment and Overhead: Consider costs like tools, software, office space, or utilities the employee uses. This is harder to pin down per person but can be estimated as a percentage of wages or a flat rate.
    • Example: $50/week for a computer, desk, and supplies.
  7. Training and Onboarding: If relevant, amortize one-time costs (e.g., $1,000 for initial training) over the employee’s expected tenure.
    • Example: $1,000 over 2 years (104 weeks) = $9.62/week.

Putting It Together

For the example employee:

  • Wages: $800
  • Overtime: $150
  • Taxes: $77.20
  • Benefits: $164.38
  • Workers’ Comp: $16
  • Overhead: $50
  • Training: $9.62
  • Total Weekly Cost: $800 + $150 + $77.20 + $164.38 + $16 + $50 + $9.62 = $1,267.40

Formula

True Cost = (Wages × Hours Worked) + (Overtime) + (Tax Rate × Wages) + (Benefits Cost) + (Insurance Rate × Wages) + (Overhead) + (Training ÷ Time Period)

Tips

  • Adjust rates and benefits based on your location, industry, and specific policies.
  • For salaried employees, divide annual costs by 52 weeks or 2,080 hours (40 hours/week × 52) to get a per-unit cost.
  • Use actual data from payroll and HR systems for precision.

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