How to Calculate the True Cost of Hiring an Employee
Hiring an employee is about more than the salary you offer. Employers may also need to account for payroll taxes, benefits, insurance, equipment, software, recruiting costs, and other expenses.
Understanding the true cost of a new hire can help you create a realistic hiring budget and avoid committing to an expense that your business isn’t ready to support.
What Is the True Cost of an Employee?
The true cost of an employee is the total expense your business incurs to employ that person.
Salary is usually the largest component, but it isn’t the only one.
For example, an employee earning $60,000 per year may cost the business significantly more than $60,000 after payroll taxes, benefits, equipment, software, and other employment-related expenses are included.
The actual cost varies by employee, role, location, benefits, and business.
Start With Base Salary
Begin with the employee’s expected annual salary.
For example, if you plan to pay an employee $60,000 per year, that is your starting point—not necessarily your total employment cost.
For hourly employees, you may instead begin with the expected hourly rate and estimated hours worked.
Account for Employer Payroll Taxes
Employers generally have payroll tax obligations associated with employees.
Depending on your situation, these can include employer portions of Social Security and Medicare taxes, federal unemployment taxes, and applicable state or local taxes.
These costs should be included when estimating the total cost of a new hire.
Consider Benefits
Benefits can add a significant amount to the cost of employment.
Depending on what your business provides, this may include:
- Health insurance
- Retirement contributions
- Paid time off
- Life or disability insurance
- Other employee benefits
Not every business offers the same benefits, so use your actual expected costs whenever possible.
Don’t Forget Other Hiring Costs
The cost of hiring can extend beyond salary and benefits.
You may also have expenses related to:
- Recruiting
- Job advertising
- Background checks
- Equipment
- Computers and other technology
- Software subscriptions
- Training
- Office space
- Professional services
Some of these are one-time costs, while others continue throughout the employee’s time with the company.
Calculate the Monthly Cost
Once you’ve estimated the annual employment costs, convert them into a monthly figure.
For example, if the total estimated annual cost of an employee is $78,000:
$78,000 ÷ 12 = $6,500 per month
This monthly figure can be particularly useful when comparing the hire against your current revenue, expenses, cash flow, and startup runway.
Compare the Hire With Your Business’s Financial Position
Before hiring, consider whether your business can comfortably support the additional expense.
Review your current revenue, operating expenses, cash reserves, and runway.
A hire may be strategically important, but timing matters. A business that can afford a new employee today may have a very different financial position several months from now.
Think About the Business Impact
Cost is only one side of a hiring decision.
Consider what the employee is expected to accomplish.
Will the hire allow you to serve more customers? Increase revenue? Reduce a bottleneck? Free the founder to focus on higher-value work? Improve an important business function?
The potential return from the hire should be considered alongside its cost.
Calculate Your New Hire Cost
Want to estimate the total monthly cost of bringing on an employee? Use the ThinksmithOS New Hire Cost Calculator to account for salary and additional employment costs.
What to Do Next
A hiring decision should be based on more than whether you can afford the salary.
Estimate the full cost, understand how the expense affects your monthly cash flow, and consider what the employee needs to accomplish for the business.
When possible, connect the hiring decision to a measurable business objective. That makes it easier to evaluate whether the investment is producing the results your business needs.
Hiring is an important milestone in a growing business. The goal isn’t simply to add employees—it’s to build the capacity your business needs to move forward.