How to calculate the true cost of an employee

1. Yearly wages

Hourly wage × hours a week × paid weeks. A front-desk hire at $15 an hour, 35 hours a week, paid 52 weeks: $27,300.

2. Employer Social Security and Medicare

You pay 6.2% Social Security (on wages up to $184,500 in 2026) plus 1.45% Medicare: 7.65% for most small-business wages. $27,300 × 0.0765 = $2,088.

3. Federal and state unemployment

Federal unemployment (FUTA) is 6.0% of the first $7,000 of each employee’s wages, usually cut to 0.6% by the credit for paying state unemployment on time: $42. State unemployment is your state’s rate times its wage base; new employers usually get a starting rate from the state. In this example, 3% on the first $10,000: $300.

4. Workers’ comp

Priced per $100 of payroll, and the rate depends on the job and your state. Office work is usually far cheaper than roofing. At an example rate of $0.50 per $100: $27,300 ÷ 100 × 0.50 = $137. Get a real quote.

5. Benefits and everything else

A $150 monthly health stipend ($1,800), payroll software ($480) and first-year hiring and training costs ($800).

6. Add it up

$27,300 + $2,088 + $42 + $300 + $137 + $1,800 + $480 + $800 = about $32,947 a year: 21% over wages, or about $18.10 per paid hour instead of $15.

7. Test whether the business can carry it

Divide the true cost by the gross margin on the extra sales the hire makes possible. At a 60% margin: $32,947 ÷ 0.60 = about $54,900 of added sales a year. For roles that don’t bring in sales directly, ask what owner hours they free up, and what you’ll earn with them.

In a spreadsheet

Planning estimate, not payroll or legal advice. Rules for overtime, paid leave and other payroll taxes vary by state.

Published by Groundwork Business Advisory. Updated October 19, 2026.