How to Calculate Your Employee’s “True Cost” (A Step-by-Step Guide)

Hiring a new employee involves much more than just their hourly wage or annual salary. As a business owner, you are responsible for payroll taxes, insurance, benefits, and hidden overhead costs.

We built the Key Forecasts Executive Compensation Calculator to help you uncover these hidden numbers. Use this guide to understand exactly what each field means and where to find the data you need.

Part 1: Location & Core Pay

Select City

Why it matters: Different cities have different Minimum Wage ordinances.

• How to use it: Select the city where the employee will physically work.
• The Alert: If your entered salary results in an hourly rate below that city’s minimum wage, our calculator will show a red warning box. You must increase the salary to remain compliant.

Hours Per Week

Why it matters: This determines the “hourly rate” calculation.

• Full-Time (40 hrs): Standard for most salaried employees.
• Part-Time (20-30 hrs): Use this if the employee is not working a full schedule.

Part 2: The “Hidden” Payroll Taxes

This section estimates the employer’s tax burden. While FICA and Medicare are standard, other rates vary by business.

1. FICA (Social Security) & Medicare

• What it is: The federal requirement for social security and medical benefits.
• The Rate: Standard ~7.65% total (6.2% FICA + 1.45% Medicare).
• Where to find it: These are federal standards; you do not need to look them up.

2. CA SUI / ETT (State Unemployment)

• What it is: Insurance paid to the state in case you lay off employees.
• How to find your rate: This varies based on your “experience rating” (how many claims you’ve had).
  • New Employers: Usually start at 3.4%.
  • Established Employers: Check the “Notice of Contribution Rates” mailed to you by the EDD every December. Rates can range from 1.5% to over 6%.

3. Workers’ Compensation

• What it is: Insurance that covers medical costs if an employee gets hurt on the job.
• How to find your rate: This depends on the Class Code (risk level) of the job.
  • Clerical/Office Work: Low risk (approx. 0.5% – 1.5%).
  • Construction/Manual Labor: High risk (can be 10% – 20%+).
  • Action: Check your insurance policy declaration page or ask your broker for your “Rate per $100 of payroll.”

Part 3: Monthly Overhead (Amortization)

This is the most overlooked section. Every employee uses company resources. To find the “monthly cost” of a resource, we use Amortization.

Formula: Total Cost of Item ÷ Useful Life (in Months) = Monthly Cost

Examples of Overhead to Add:

1. Work Laptop / Computer
   • Scenario: You buy a MacBook for $1,200. You expect it to last 3 years (36 months).
   • Math: $1,200 ÷ 36 = $33.33 / month.
   • Entry: Click “+ Add Line Item,” type “Laptop,” and enter “33.33”.
2. Software Licenses
   • Scenario: You pay for their email (Google Workspace, $12/mo), Zoom ($15/mo), and Slack ($8/mo).
   • Entry: Add a line item “Tech Stack” for $35.00.
3. Office Space Allocation
   • Scenario: Your office rent is $5,000/mo. You have 5 employees.
   • Math: $5,000 ÷ 5 = $1,000 / month.
   • Entry: Add a line item “Rent Allocation” for “1000”.

Part 4: Benefits & PTO (The “Shadow” Costs)

Retirement Match

If you offer a 401k with a 4% match, you are paying an extra 4% on top of their salary.

• Input: Enter the percentage you plan to match (e.g., “4”). The calculator will show the annual dollar cost.

PTO (Paid Time Off)

What is this number? PTO is a “productivity cost.” You are paying the employee not to work.

• Example: If you give 2 weeks of vacation per year, that is approx. 6.6 hours accrued per month.
• The Calculation: The calculator takes their hourly rate × PTO hours to show you the “value” of that non-working time.
• Note: This calculator treats PTO as a “Productivity Cost” (shadow cost), not a cash addition.
• Why? When you pay an employee a salary (e.g., $50,000), that amount already includes their vacation days. You don’t pay extra cash for vacation unless:
  • They leave the company (accrued vacation is considered earned wages in CA and must be paid out).
  • You have to hire a temp to cover their shift.
• Therefore, the PTO dollar amount shown is for your analysis only and is not added to the “Total Cash Cost” checkbook figure.

Part 5: Reading Your Results

The “Grand Total Cost”

This is the check you actually write. It combines Salary + Taxes + Insurance + Benefits + Overhead. It is often 20% to 40% higher than the base salary.

The “Labor Multiplier”

This is your efficiency score.

• 1.0x: Impossible (means zero taxes or overhead).
• 1.2x to 1.4x: Healthy standard. (It costs you $1.30 to pay them $1.00).
• 1.5x+: High overhead. You might be paying too much for benefits, rent, or insurance relative to the salary.

Need Help Finding Your Exact Rates?

Payroll compliance is complex. If you don’t know your current SUI rate or Workers’ Comp class code, Key Forecasts can audit your payroll setup to ensure you aren’t overpaying.

[Key Forecasts provides payroll services and accounting solutions to small businesses in California]