Why the True Cost Surprises Business Owners
Most business owners think of employee cost as salary. The reality, according to the Bureau of Labor Statistics Employer Costs for Employee Compensation (ECEC), is that benefits and legally-required costs add 25% to 40% on top of wages for private industry workers. For a $60,000 salary, that means the real cost is $75,000 to $84,000—or more if you offer generous benefits.
This gap catches business owners off guard because most of these costs are invisible in day-to-day operations. Payroll taxes come out automatically. Insurance premiums are paid quarterly or monthly. Equipment depreciates silently. PTO is earned but not billed. The only way to see the real number is to stack up every cost in one place—which is exactly what this calculator does.
The Hidden Costs Most Owners Miss
Beyond the obvious categories in the calculator, several costs are easy to overlook:
- Management time: Every employee requires supervision, feedback, and administrative handling. If a manager earning $80,000 spends 10% of their time managing a new hire, that is $8,000 in management overhead that does not show up on any benefits statement.
- Recruiting and onboarding: The SBA estimates that hiring costs (job postings, background checks, training time) can run $3,000 to $5,000 or more per hire. If turnover is high, this repeats frequently.
- Ramp-up time: New employees rarely produce at full capacity for 3 to 6 months. During ramp-up, you are paying full cost but receiving partial output.
- Error and rework costs: New employees make more mistakes. The cost of fixing errors, redoing work, and handling customer complaints from inexperience is real but hard to quantify.
- Turnover replacement: When an employee leaves, you lose their productivity, spend money recruiting a replacement, and start the ramp-up cycle again. Industry estimates put turnover cost at 50–200% of annual salary depending on the role.
Understanding Payroll Taxes
The IRS requires employers to pay their share of FICA taxes: 6.2% for Social Security (on wages up to the annual cap) and 1.45% for Medicare (no cap), totaling 7.65%. On top of that, federal unemployment tax (FUTA) is 0.6% on the first $7,000 of wages, and state unemployment tax (SUTA) varies by state and your claims history, typically 0.5–5.4%.
For a $60,000 salary, the employer FICA alone is $4,590. Add FUTA ($42) and a mid-range SUTA (say 2.5% on $7,000 = $175), and payroll taxes alone cost nearly $5,000—before you spend a dime on benefits.
When to Hire vs. Contract
The true cost calculation is essential for the hire-vs-contract decision. A contractor charging $50/hour looks expensive compared to an employee making $25/hour ($52,000 salary), but once you add employer costs, the employee’s true hourly rate is $31–$35/hour—and the contractor requires no benefits, no payroll tax, no workers comp, and no overhead.
Use contractors when:
- The work is project-based or seasonal. If you need help for 3 months, the recruiting and onboarding cost of a full-time hire never pays off.
- The skill is specialized. Hiring a full-time web developer at $90,000+ when you need 10 hours/month of development work is wastly less efficient than contracting.
- You are testing the role. Before committing to a full-time position, hiring a contractor for 3–6 months validates whether the role generates enough value to justify the full cost.
Hire full-time when:
- The work is ongoing and core to your business. If you need someone 40 hours a week indefinitely, the per-hour cost of an employee is almost always lower than a contractor at equivalent quality.
- You need control over how the work is done. Employees can be managed, trained, and developed. Contractors control their own methods—that is the legal distinction.
- Retention and institutional knowledge matter. Contractors leave when the project ends. Employees build deep knowledge of your business, customers, and processes over time.
The Revenue-Per-Employee Benchmark
A useful rule of thumb: each employee should generate 2x to 3x their fully-loaded cost in revenue. For a $75,000 fully-loaded employee, that means $150,000 to $225,000 in revenue. If an employee is generating less than 2x their cost, the position is either underperforming or the role needs to be restructured.
Service businesses often target 3x or higher because labor is their primary cost. Product businesses with significant material costs may operate closer to 2x. The key is to know your number and track it.
Reducing Employee Costs Without Cutting Salaries
Cutting salaries destroys morale and drives turnover, which is even more expensive. Instead, focus on these levers:
- Shop health insurance annually. Plans vary dramatically. Switching carriers or adjusting plan design can save 10–20% without reducing coverage quality.
- Optimize workers comp classification. Make sure employees are classified in the correct risk category. An office worker misclassified as field labor can cost 3–5x more in workers comp premiums.
- Share overhead across headcount. Buying bulk software licenses, sharing equipment, and using co-working spaces instead of dedicated offices reduce per-employee overhead.
- Reduce turnover. Every employee who stays saves you the $3,000–$5,000+ cost of recruiting and training a replacement, plus the productivity loss during ramp-up. Retention is the cheapest way to lower true cost.
Sources
- Bureau of Labor Statistics — Employer Costs for Employee Compensation — National data on wages, benefits, and total compensation costs
- U.S. Small Business Administration — Hire & Manage Employees — Hiring guidance, legal requirements, and cost considerations
- IRS — Understanding Employment Taxes — Federal payroll tax rates, requirements, and filing guidance