How to Calculate the Costs of An Hourly Employee: A Comprehensive Guide

As an employer, it’s important to know how much your labor costs beyond just wages. An employee cost calculator allows you to know how much an employee costs on your payroll with wages, benefits, taxes, etc. Knowing employee costs is important, because it allows you to understand cash flow, cost of goods/services, and can inform future hiring decisions. 

How To Use An Employee Cost Calculator?

The best free employee cost calculator in 2022 comes from Intuit Quickbooks. Another good cost calculator comes from Omni Calculator. 

To use an employee cost calculator, you need to know a few basic numbers about your employee or potential employee. First, you need to know their hourly wage or salary. Second, you need to know the total hours worked for an hourly employee. These two numbers will provide a basic employee cost. 

To find the true cost of an hourly employee or salaried employee, you should enter tax, benefits, and perks information. 

How Much Does An Employee Cost?

Every employee costs a different amount based on their contract and role. When calculating the cost of an employee, business owners must factor in more than just their salary or wage. The fully loaded cost for an employee includes taxes, benefits, insurance, commission, etc. 

Employers will need to include personal supplies, such as laptops or a company car. Some employers will also include a proportional amount of the costs such as the electric bill in the office, although this is not the norm. Many software companies that small businesses use include per employee per month pricing models. The most common example of this is payroll. These costs could also be included in supplies. 

The formula for the annual cost of an hourly employee is: 

Annual Cost = wage × hours worked + taxes + benefits + insurance + supplies + overtime

Overtime = wage × 1.5 × overtime hours 

The formula for the annual cost of a salaried employee is:

Annual Cost = salary + taxes + benefits + insurance + supplies + bonuses + commission

You can find the information about tax rates by states from the IRS here. 

What Is The Average Labor Cost?

According to the Bureau of Labor Statistics, in June 2022, the average labor cost for salaried and hourly employees in the private sector was $41.87 per hour. The breakdown of this cost is $27.44 in wages, $11.47 in benefits and $2.96 in insurance. Based on these numbers, salary or hourly wage only accounts for about two-thirds of the total cost of an employee. 

Average labor cost is a fluctuating number. In the year from September 2021 to September 2022, the average total compensation for workers grew by 5.0%. As you build and grow your business, do research for appropriate and fair salaries for each position. 

How Do You Calculate Labor Cost For A Small Business?

If it’s not clear by now, labor cost is not a sum of salaries and wages. There are many more business costs related to having an employee. To calculate the labor cost for a small business, you should calculate the cost in multiple ways to cross check. 

The first way is to calculate using the annual cost for a single employee formula, but for the whole business. In other words, instead of a salary relating to one employee, it’s a sum of all employee salaries. The other cost that could be included here is the cost to hire. You should discuss whether this is a labor cost for your business or something separate. 

Annual Cost = salaries + taxes + benefits + insurance + supplies + bonuses + commissions

The second way is to track labor costs based on your bookkeeping. With your accountant, you can decipher which accounts are related to labor costs and track these clearly. The advantage of this method is that you are using actual, live data. This means employees who started mid-way through the year wouldn’t be counted at their salary, but at portion of their salary. This method takes effort, but it is extremely effective. 

How Milestone Helps Small Businesses Tackle Payroll

Milestone’s focus is on entrepreneurs looking to have a more efficient back office. We work with hundreds of small businesses to help improve back office functions. Our payroll services team has extensive experience with a variety of systems, cadence types, tax information, and processing styles that we can use to build the best solutions for your payroll. You know your business, and we know payroll. Reach out today to make payroll easier for you and your team.