Understanding the true cost of employees is crucial for any business looking to manage resources effectively. That’s why we’ve created this free spreadsheet download and video tutorial with detailed instructions and formulas to easily calculate employee cost at your company, as well as to forecast new hires. It’s more than just base salaries; it encapsulates a variety of associated expenses. It’s key to understand that employers pay more than just the salaries of their employees. Here we’ll explore the main variables to help calculate the actual annual cost of your workforce.
We’ll help you analyze these costs in-depth, shedding light on the full financial impact employees have on an organization’s bottom line.
Note: How much does an employee cost? This article addresses some of the primary considerations you need to know when hiring someone in the private sector in the United States.
Some of the information you will find here is easily adaptable to other countries, like social security related expenses. Our particular case is based on salaried employees as opposed to hourly rate workers. While many employers and institutions (including the Bureau of Labor Statistics of the U.S. Department of Labor) prefer to work around hours rather than salaries, we have opted for the latter to give you a better idea of the real annual costs of your employees.
Calculating your labor rates is a complex exercise that requires a careful examination of different variables like the industry you belong to, the type and characteristics of the role you are planning to cover, the location of your company, and the kind of benefits and legal expenses you are willing and required to pay for that employee. While this may be intimidating at first, there are some basic variables that will always affect your labor rates. We will explore those variables so you can better calculate the potential costs posed by a new hire.
The base salary in the U.S. is the fixed amount of money an employee gets before any extras are added or taken off. It doesn’t include bonuses, overtime, or any other potential compensation from the employer. It’s often paid out in yearly or monthly terms, and can vary widely based on the role, industry, and location.
Let’s start our example: If you want to hire someone on a salary of, say, $30,000 a year, you need to be prepared to pay much more than that. In addition to the base salary, you need to cover other things like employment taxes and benefits (e.g. health insurance, 401(k)). While this calculation is complex, there are some simple formulas we can use to have an idea of the actual annual cost of an employee. We chose the following 2.
Let’s start with Joe Hadzima, a Senior Lecturer at MIT who provides a simple formula to calculate the actual cost of an employee. According to Hadzima, once you have taken into consideration basic salary, taxes, and benefits, the actual costs of your employees are typically somewhere between 1.25 to 1.4 times the base salary. In other words, an employee earning $30,000 will cost you somewhere between $37,500 and $42,000.
Similarly, and while trying to answer the question, “How much does an employee really cost?” CNN’s reporter Jose Pagliery said that the real salary of an employee ends up “being 18% to 26% more than a worker’s base salary.” That said, let’s take the formulas we have just mentioned and see how they work for specific salaries:
Insights gained from incorporating your employees’ costs into your business intelligence are sure to save you time and money in the long run.
Furthermore, having a clear understanding of everything that goes into maintaining an employee may change the way you look at your human capital. Nevertheless, while substantial, these costs shouldn’t be viewed as an unfair burden on your company, as investing in your workforce is key to sustaining a successful business.
Please let us know your thoughts, suggestions, or corrections. Thank you!
We have created a free Excel template for you with all the formulas you need to calculate the costs of your employees. Please fill out the form below to receive your free spreadsheet!
