To calculate employee cost per hour, add everything you spend on that worker in a year — wages, payroll taxes, benefits, insurance, and a share of overhead — then divide by the hours they actually spend working, not the 2,080 hours a full-time schedule appears to promise. The result is almost always 20 to 40 percent higher than the base wage would suggest, and getting it right is what lets you price services, evaluate a new hire, and avoid cash-flow surprises.
Step 1: Add Up Wages and Payroll Taxes
Start with gross annual wages. Every dollar of that pay triggers federal payroll taxes the employer must match or pay outright.
Social Security and Medicare
Under FICA, employers owe 6.2 percent of wages for Social Security and 1.45 percent for Medicare.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Social Security applies only up to a wage base of $184,500 in 2026; earnings above that cap are not taxed at 6.2 percent.2Social Security Administration. Contribution and Benefit Base Medicare has no cap. For an employee earning $65,000, these two taxes cost about $4,973 a year.
Federal and State Unemployment
The federal unemployment tax (FUTA) rate is 6.0 percent on the first $7,000 of each employee’s wages. Pay your state unemployment taxes in full and on time and you get a credit of up to 5.4 percent, which drops the effective FUTA rate to 0.6 percent — a maximum of $42 per employee per year.3Internal Revenue Service. Topic No. 759, Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return The $7,000 wage base is confirmed for 2026.4Internal Revenue Service. Publication 15-A (2026), Employers Supplemental Tax Guide
State unemployment (SUTA) rates vary widely by industry and claims history. Most employers pay between roughly 1 and 5 percent, with a taxable wage base set by each state. A newer business or one in a high-turnover industry usually sits near the top of that range.
Other Payroll-Level Taxes
Some states and a handful of cities layer on additional employer payroll taxes: paid family and medical leave contributions (zero to under 1 percent of wages in states that mandate them) and local occupational or payroll taxes. If your jurisdiction charges these, include them.
Step 2: Add Benefits and Insurance
Health Insurance
Employer-sponsored health coverage is typically the single largest benefit line. Average total premiums in 2025 reached $9,325 for single coverage and $26,993 for family coverage, with employers paying the majority.5KFF. 2025 Employer Health Benefits Survey Your actual outlay depends on the plan and the share of premium you cover, but a working range is $7,000 to $20,000 per employee per year depending on single versus family enrollment.
Retirement Contributions
If you offer a 401(k) match, that match is part of your labor cost. The average employer contribution across plans is roughly 4.8 percent of salary. For a $65,000 employee at a 4 percent match, that is $2,600 a year. Plan administration and recordkeeping fees typically run $45 or more per participant.
Workers’ Compensation
Workers’ comp premiums track job classification and injury risk. An office employee might cost as little as $0.15 per $100 of payroll; a construction worker could cost $10 or more per $100. At $65,000 in salary, that is roughly $98 a year for the office role and potentially more than $6,500 for the construction role. Rates also vary by state and by your claims history.
Step 3: Add the Overhead a Paycheck Doesn’t Show
Not every cost tied to an employee shows up on a pay stub. Assign a share of indirect costs to each worker to see what an hour actually costs.
- Software and tools. Productivity suites, project management platforms, and industry-specific applications commonly run $500 to $2,000 per user per year.
- Workspace. A proportional share of rent or mortgage, utilities, and furniture. This varies dramatically by location, but track it.
- Equipment. Computers, phones, and specialized gear depreciate; spread their cost over useful life and assign a share to the user.
- Recruiting and onboarding. The average cost to hire a new employee is about $4,800 — job postings, background checks, interview time, initial training. Amortize it across the employee’s expected tenure to get a per-year figure.
These items often hide in general ledger accounts rather than sitting next to payroll. Pulling them into the per-employee number is what prevents underpricing your services.
Step 4: Find Productive Hours, Not 2,080
A standard full-time schedule is usually estimated at 2,080 hours a year (40 hours × 52 weeks). That figure overstates the time your employee spends producing revenue, because it includes every paid hour whether productive or not. To get productive hours, subtract the paid time that generates no direct output.
Paid Absences
- Vacation and personal days. A mid-level employee typically gets 10 to 15 days (80 to 120 hours) of paid vacation.
- Holidays. Most employers observe 8 to 10 holidays, or 64 to 80 hours.
- Sick leave. Many states now mandate paid sick leave, with minimums from about 24 to 56 hours a year. Even where it isn’t required, budget 3 to 5 sick days.
Paid but Non-Productive Time
Training, safety sessions, all-hands meetings, and administrative tasks can easily consume 50 to 100 hours per employee per year. Federal rules also require that short rest breaks of 5 to 20 minutes count as compensable working time.6eCFR. Title 29, Part 785 – Hours Worked Those breaks are hours you pay for that don’t produce revenue.
After subtracting paid absences and non-productive time, a typical full-time employee works roughly 1,700 to 1,800 productive hours a year. Using that smaller number as your denominator keeps the hourly cost honest.
Step 5: Run the Formula
The math is simple:
True hourly cost = Total annual employee cost ÷ Productive hours
Here’s a worked example for an office employee at $65,000:
- Gross wages: $65,000
- Social Security (6.2%): $4,030
- Medicare (1.45%): $942
- FUTA (0.6% on $7,000): $42
- State unemployment (estimated 2.5% on $7,000): $175
- Health insurance, employer share, single: $7,500
- 401(k) match (4%): $2,600
- Workers’ comp, office classification: $98
- Software and equipment: $1,500
- Recruiting, amortized: $960
Total annual cost: $82,847.
At 1,760 productive hours after vacation, holidays, sick days, and training, the true hourly cost is $82,847 ÷ 1,760 = $47.07 per hour. That is roughly 27 percent above the $37.26 you’d get by dividing $65,000 by 1,760 alone. Add family health coverage or a higher workers’ comp classification and the markup can reach 40 to 50 percent above the base wage equivalent.
Overtime Hours Cost More — Calculate Them Separately
When a non-exempt employee works more than 40 hours in a week, federal law requires at least 1.5 times the regular rate for each overtime hour. As of 2026, the salary threshold for the white-collar overtime exemption is $684 per week ($35,568 a year), based on the 2019 rule that remains in effect after a federal court vacated the higher 2024 thresholds.7U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption Salaried employees earning below that amount generally must receive overtime pay.
Overtime also raises the employer share of FICA on the additional wages. If the regular rate is $25 per hour, each overtime hour costs $37.50 in wages plus roughly $2.87 in FICA (7.65 percent of $37.50), so the direct cost of that hour is over $40 before benefits and overhead. Non-discretionary bonuses and shift differentials must be folded into the regular rate before applying the overtime premium.8U.S. Department of Labor. Fact Sheet 56A: Overview of the Regular Rate of Pay Under the FLSA If your business runs on overtime, calculate the hourly cost for those hours separately.
Recalculate Every Year and Keep the Records
Federal law requires employers to keep records of each non-exempt employee’s hours worked per day and per week, rate of pay, total wages, and all additions or deductions. Payroll records must be kept for at least three years; supporting time records, at least two.9eCFR. Title 29, Part 516 – Records to Be Kept by Employers Accurate time tracking is what makes the hourly cost calculation reliable in the first place.
Rerun the calculation at least once a year, or any time a major input changes. Health premiums adjust annually, the Social Security wage base rises most years (from $176,100 in 2025 to $184,500 in 2026), and state unemployment rates shift with your claims history.2Social Security Administration. Contribution and Benefit Base A billing rate set on last year’s numbers can quietly erode your margins once the underlying costs have moved.