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Free Employee True Cost Calculator

What Is the True Cost of an Employee?

The true cost of an employee includes both the wages you pay directly to the worker and the additional expenses the company incurs because that employee is on payroll.

These additional costs are often called labor burden.

They may include:

• Employer payroll taxes
• Workers’ compensation insurance
• Unemployment taxes
• Health insurance
• Retirement contributions
• Paid vacation
• Paid holidays
• Paid sick time
• Bonuses
• Uniforms
• Training
• Payroll processing
• Other employee-specific costs

The result can be significantly higher than the employee’s stated hourly wage.

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Why Hourly Wage Can Be Misleading

Suppose you hire an employee at:

$25 per hour

If that employee works 2,080 paid hours per year, their base annual wage is:

$52,000

But imagine the company also pays:

10% payroll-related taxes

8% workers’ compensation

$6,000 per year in health insurance

$2,000 in retirement contributions

$3,000 in other employee costs

The employee’s true annual cost would be far higher than $52,000.

That difference matters when:

• Pricing jobs
• Building labor rates
• Deciding whether to hire
• Comparing employees with subcontractors
• Establishing crew production goals
• Forecasting payroll expense
• Calculating overhead and profit

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How the Employee True Cost Calculator Works

The calculator starts with the employee’s:

Hourly wage

and:

Annual paid hours

It then adds:

• Payroll tax percentage
• Workers’ compensation percentage
• Other percentage-based burden
• Health insurance
• Retirement contribution
• Other annual employee costs

The calculator estimates:

Base Annual Wage

Total Annual Burden

True Annual Employee Cost

True Cost per Paid Hour

Total Burden Percentage

It also shows how much more the employee costs than the base hourly wage.

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Percentage Costs vs. Fixed Annual Costs

Some employee expenses are naturally calculated as a percentage of payroll.

Examples include:

• Employer payroll taxes
• Workers’ compensation
• Certain unemployment taxes

Other expenses may be better treated as fixed annual costs.

Examples include:

• Health insurance
• Retirement contributions
• Uniform allowance
• Training
• Cell phone allowance
• Annual bonuses

This calculator lets you enter both types.

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What About Paid Time Off?

Paid time off is a little different because the employee is still receiving wages during hours when they are not producing work.

There are two ways contractors often think about this:

Employee True Cost
How much the employee costs the company overall.

Effective Labor Cost
How much the employee costs for each productive hour.

This calculator focuses primarily on the true cost of employing the person.

For productive-hour cost, use the Effective Labor Rate Calculator, which accounts for non-billable and nonproductive paid time.

That distinction helps prevent the two calculators from feeling repetitive.

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Example: What Does a $25-an-Hour Employee Really Cost?

Suppose an employee earns:

$25/hour

and is paid for:

2,080 hours per year

Base annual wage:

$52,000

Assume:

10% employer payroll taxes = $5,200

8% workers’ comp = $4,160

5% other percentage burden = $2,600

$6,000 health insurance

$1,500 retirement contribution

$2,000 other annual costs

Total additional employee cost:

$21,460

True annual employee cost:

$73,460

True cost per paid hour:

$35.32/hour

So the employee paid $25 per hour actually costs the company approximately $35.32 for every paid hour under those assumptions.

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Employee Cost Is Not the Same as Billing Rate

The true hourly cost of an employee is not automatically the rate you should charge customers.

Your selling rate may also need to account for nonproductive time and cover:

• Company overhead
• Equipment
• Supervision
• Risk
• Desired profit

If an employee truly costs $35 per paid hour, charging customers $35 per hour would generally leave nothing to cover the rest of the business.

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In Summary

Employee True Cost answers:

“What does this employee actually cost my company in total?”

It starts with wages and adds employer-paid costs such as payroll taxes, workers’ comp, benefits/uniforms, PTO, etc. You can express that as an annual total or an average cost across all paid hours.

Effective Labor Cost / Effective Labor Rate takes it one step further:

“What does this employee cost me for each hour that is actually productive?”

Instead of dividing total employee cost by all paid hours, you divide it by productive hours.

Employee True Cost Calculator FAQ

How much more does an employee cost than their hourly wage?

There is no universal percentage. The answer depends on payroll taxes, workers’ compensation, benefits, paid time off and other employee expenses.

What payroll taxes should I include?

Include employer-paid payroll taxes and unemployment-related costs that apply to your business. Rates vary by company, employee, state and tax situation.

Should workers’ compensation be included?

Yes, if workers’ compensation is an employer expense associated with that employee. Rates can vary significantly by trade and job classification.

Should health insurance be included?

Yes, include the amount the company pays toward the employee’s health insurance if you want a more complete estimate of true employee cost.

Is paid vacation included in this calculator?

The employee’s annual paid hours already represent paid time. However, if you want to calculate the cost per productive hour after accounting for PTO and nonproductive time, use the Effective Labor Rate Calculator.

Is an employee’s true cost the same as labor burden?

They are closely related. Labor burden generally describes the costs added to base wages. True employee cost combines base wages and burden into the total cost of employing the worker.

Can I use this calculator when deciding whether to hire?

Yes. It can help estimate the actual annual financial commitment associated with adding an employee rather than looking only at their hourly wage.