How to calculate the full cost of an employee

What to include in employee cost

Build the estimate from annual pay, employer payroll taxes, benefits, and overhead. For a new hire, include recruiting and onboarding costs in the first-year total.

1. Employer payroll taxes and workers' compensation. Include employer Social Security, Medicare, and federal and state unemployment taxes. Calculate each using the applicable rate and wage base. Workers' compensation insurance is required in nearly every state, so add its premium for the role and state.
2. Benefits. Include employer-paid health insurance, retirement contributions, life insurance, disability coverage, and other benefits. For salaried employees, paid leave reduces the hours available for productive work.
3. Hiring and ramp-up costs. Include recruiting, onboarding, and reduced productivity during the initial ramp-up period in your first-year estimate.
4. Overhead. Include equipment, workspace, software, and an appropriate share of operating expenses.

Calculate employer payroll taxes

For 2026, use the following federal rates to calculate employer payroll taxes. Add your employer-specific state unemployment rate and workers' compensation premium.

Social Security 6.2%

Employers pay 6.2% of wages up to the 2026 annual wage base of $184,500. Maximum annual employer contribution: $11,439 per employee.

Medicare 1.45%

Employers pay 1.45% of Medicare wages at every earnings level. The additional 0.9% Medicare tax above the applicable earnings threshold is paid by employees.

Combined FICA 7.65%

Employer Social Security and Medicare total 7.65% of wages up to the Social Security wage base. Above $184,500, the employer Medicare rate remains 1.45%.

Federal unemployment 0.6% net

FUTA is 6.0% on the first $7,000 of wages. With the standard 5.4% state tax credit, employers generally pay 0.6%, or $42 annually for an employee earning at least $7,000. Check the IRS FUTA credit-reduction schedule for additional tax applicable to your state and tax year.

State unemployment Varies

Calculate state unemployment using your assigned rate and the state's taxable wage base. States generally establish new-employer rates and may adjust them based on employer experience.

Workers’ compensation Varies

Premiums depend on the state, job classification, and claims history. Use your actual insurance cost when available.

How your costs compare with BLS averages

The Bureau of Labor Statistics reports employer spending on wages and benefits each quarter. In June 2026, private industry employers spent an average of $46.89 per hour in total compensation: $32.82 in wages and salaries, representing 70.0%, and $14.07 in benefits, representing 30.0%. Across civilian workers, including state and local government employees, average compensation was $49.46 per hour, including $15.61 in benefits.

Benefits accounted for 30.0% of total private industry compensation, or approximately 43% of wages alone ($14.07 compared with $32.82). Use the wages-based figure when estimating benefits as a percentage of base salary.

BLS groups benefits into five categories: paid leave, supplemental pay, insurance, retirement and savings, and legally required benefits. Legally required benefits include employer payroll taxes and workers' compensation. Keep the categories separate so each expense is counted once. For example, paid leave is already part of a salaried employee's annual pay, while employer payroll taxes are additional employer expenses. The BLS averages include workers with different benefit arrangements, including those who receive no benefits. Use your own benefit premiums, payroll taxes, and operating costs for the final estimate.

Annual cost and productive-hour cost

Divide annual employee cost by estimated productive hours to calculate cost per productive hour. For salaried employees, paid leave is already included in annual pay. Because paid leave reduces the hours available for work, the cost per productive hour increases.

A 40-hour workweek over 52 weeks equals 2,080 paid hours, or 260 working days. Paid time off, holidays, and sick days reduce the hours available for work. Three weeks of vacation, ten holidays, and five sick days come to about 240 hours, which leaves roughly 1,840 productive hours.

Dividing annual cost by 1,840 productive hours gives a higher hourly rate than dividing it by 2,080 paid hours. Use annual cost for workforce budgets and productive-hour cost for project estimates. For client billing and project pricing, also account for utilization because available work hours and billable hours may differ.

An employee earning $60,000

Here is the annual cost of a salaried employee earning $60,000, using 2026 federal payroll tax rates and assumed benefit and state-specific costs.

The example totals $74,952, approximately 1.25 times base salary. Replace the illustrative amounts with your health plan costs, retirement contributions, and state tax rates. Then add employer-specific overhead and first-year hiring costs to complete the estimate.

For comparison, June 2026 BLS private industry figures show total compensation of approximately 1.43 times wages, based on $46.89 in compensation and $32.82 in wages per hour. The BLS average reflects a broad mix of employers and benefit arrangements. Use the 1.25 to 1.4 planning range for an initial estimate, then calculate the actual costs for the role when preparing your budget.

The same $74,952 annual cost produces two different hourly rates.

$36.03 per paid hour

$74,952 divided by 2,080 paid hours.

$40.73 per productive hour

$74,952 divided by 1,840 estimated productive hours.

Base salary alone equals $28.85 per paid hour. In this example, the fully loaded productive-hour cost is approximately 41% higher than the base hourly salary rate. Use $40.73 per productive hour when estimating labor costs for this example. Add overhead, first-year hiring costs, and pricing considerations separately.

Using the estimate in your business

• Price work using full labor costs. Include salary, payroll taxes, benefits, and overhead when preparing service prices, bids, and project budgets.
• Compare benefits using the same denominator. June 2026 BLS data shows benefits at 30.0% of total private industry compensation, or approximately 43% of wages alone. Use the same denominator when comparing your own costs.
• Use productive hours for project costs. Divide annual employee cost by estimated hours available for work after paid leave and holidays. Adjust for actual schedules and utilization when preparing project budgets.
• Build a separate estimate for each role. Use 1.3 times salary for an initial estimate, then calculate payroll taxes, benefits, and overhead separately when preparing budgets or setting prices.