How much more does an employee cost than their salary?

As a rule of thumb, an employee's true cost is 1.25 to 1.4 times their base salary. This accounts for employer taxes (like payroll tax and Medicare), benefits, software licenses, and office overhead.

Why is it important to know the true cost of an employee?

If a consulting agency only bills a client based on an employee's $50,000 base salary, the agency will lose money. You must price your services based on the employee's fully-loaded cost (closer to $65,000).

True Employee Cost Calculator

The Hidden Costs of Hiring Your Next Employee

One of the biggest mistakes founders and agency owners make is assuming a $50,000 salary only costs the business $50,000. Our Free True Employee Cost Calculator reveals the "fully-loaded" payroll burden so you don't accidentally hire yourself into bankruptcy.

What is the Payroll Burden?

The payroll burden (or labor burden) represents all the extra expenses a business incurs beyond an employee's base salary. A standard rule of thumb is that an employee costs 1.25 to 1.4 times their stated salary. These hidden costs include:

Employer Taxes: Payroll taxes, Social Security, Medicare, and unemployment insurance.
Benefits: Health insurance premiums, 401(k) matching, and paid time off (PTO).
Operations: Expensive SaaS licenses, physical laptops, mandatory training, and office space.

How to Price Agency Labor

When calculating your agency's capacity, never use the base salary. Once you calculate the exact "Total Monthly Cost" above, divide that number by their productive billable hours (usually ~120 hours/month, not 160). Once you know their true hourly cost, use our Pricing Calculator to ensure you are adding at least a 40% markup on their labor, and track the overall project using our Project Timeline Planner.

Frequently Asked Questions (FAQ)

Is it cheaper to hire a contractor instead of an employee?

Generally, yes. While a contractor (1099) might charge a higher hourly rate than an employee (W-2), the business does not pay employer taxes, health benefits, or equipment costs. The trade-off is often less loyalty and control over their hours.

How much are typical employer payroll taxes?

In the United States, employers typically pay around 7.65% for FICA (Social Security and Medicare), plus varying state and federal unemployment taxes. Expect baseline taxes to be around 9% to 11% of the base salary before any benefits are added.