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Each employee costs the sum of his or her gross wages. This is in addition to other employee-related expenses, including state payroll taxes, Social Security and Medicaid taxes, and the cost of benefits (insurance, paid time off, and meals or equipment or supplies).
Calculate an employee’s labor cost per hour by adding their gross wages to the total cost of related expenses (including annual payroll taxes and annual overhead), then dividing by the number of hours the employee works each year. This will help determine how much an employee costs their employer per hour. It is important to have a consistent employee tracking software or app for long term labor cost success.
Here’s a labor cost example: Let’s say an employee is paid $15 per hour. If they work 40 hours per week for 52 weeks, they will work 2,080 hours, which makes their labor cost $31,200 (pre-tax) per year. But if that employee is absent from work for 15 days that year (taking paid time off), they will actually work closer to 1,960 hours per year — making their actual hourly rate closer to $16.
Sticking with that $31,200, we can now use the labor cost formula to determine the amount of annual overhead costs an employer pays in addition to that employee’s hourly wage. This includes building costs, property taxes, utilities, payroll taxes, benefits, insurance, supplies, and equipment costs. Once the total overhead is added together, divide it by the number of employees, and add that figure to the employee’s annual labor cost.
In this case, the employee’s annual labor cost is $31,200. But let’s say an employer spends an additional $8,000 on that employee throughout the year. Add $8,000 and $31,200 to get $39,200. Now, divide $39,200 by the number of hours the employee will actually work in a year (about 1,960) to calculate the true hourly rate of that employee. In this example, the total hourly cost of that employee is closer to $20 per hour.
The labor cost formula takes into account an employee’s hourly wages, the hours they work in a week, and the weeks they work in a year. An employer’s overhead cost per employee is also considered, in addition to the employer’s annual taxes. Each cost is added together and then divided by the employee’s hours worked per year. It’s vital that an employer has a time tracking solution in this case.
The cost of labor is the sum of each employee’s gross wages, in addition to all other expenses paid per employee. Other expenses include payroll taxes, benefits, insurance, paid time off, meals, and equipment or supplies.
Knowing the true cost of an employee is one thing, but if you’re not including the cost of overhead in your equation, you could be under-billing your clients and losing money! Knowing how to accurately calculate the cost of overhead for each employee will help you determine what to charge and how to remain profitable.
Start by determining the true cost of your employees. Not sure how to do this? Use the calculator above. Then calculate your overhead.
Overhead represents the average cost of benefits per employee. These include all the expenses you pay outside of labor costs — things like building costs, property taxes, and utilities — and they can be calculated either monthly or annually, depending on the needs of your business. To figure it out, just divide your total annual overhead costs by the number of employees at your business.
Want to determine your employee’s billable rate? Take the true cost of your employee per hour (including employee labor costs, overhead, and taxes) and add it to your profit margin. Then divide this number by the number of hours your employee works per year, and you’ve got your billable rate. No more lost profits!
As a business owner, you’re required to pay taxes for the Federal Insurance Contributions Act (FICA), which covers Social Security and Medicare, and the Federal Unemployment Tax Act (FUTA), which funds workforce agencies. On top of that, there are unemployment taxes, which vary by state but can include state income taxes and unemployment insurance.
State taxes aside, navigating federal payroll taxes can feel a bit like navigating a minefield. One wrong step and – boom! you’re in trouble with the IRS. It’s always a best practice to check with your accountant when it comes to calculating payroll taxes (or anything to do with numbers), but you can get a pretty accurate estimate by following these steps.
The Federal Unemployment Tax Act (FUTA) sets your unemployment tax rate per employee at 6 percent, but if you qualify, you can claim a 5.4 percent credit. That would make your FUTA tax rate .6 percent. However, once an employee’s year-to-date earnings surpass $7,000, you no longer have to pay the FUTA federal unemployment tax on that employee for the remainder of the year.
While you should always check with your accountant to know where you stand, businesses that file the Form 940, or the Employer’s Annual Federal Unemployment (FUTA) Tax Return, typically qualify for the 5.4 percent credit. If you pay wages of $1,500 or more to your employee in any calendar quarter, or if you oversee one or more employees (part-time, full-time, and temporary) at least some part of a day in 20 or more weeks per year, you must file Form 940.
For more information, see the IRS FUTA Credit Reduction Guide.
Social Security tax is 6.2 percent of the taxable wages paid to each employee each year (up to $127,200 for 2017, a number that changes annually).
Medicare tax is 1.45 percent of all taxable wages paid to each employee, with an additional .9 percent tax rate on wages that exceed $200,000.
This rate (and the annual wage limit) is determined for you by your state unemployment agency. Some state unemployment tax rate minimums are as low as 0.0%, as is the case in places like Hawaii, Iowa, Mississippi, Missouri, Montana, Nebraska, and South Dakota. Meanwhile, maximum tax rates can be as high as 12 percent, as is the case in Wisconsin. Always check with your accountant if you’re not sure where you stand.
Some states require employers to pay employment or job-training taxes. If you’re not sure whether or not your state is one of them, check with your accountant.
The cost of labor per employee is their hourly rate multiplied by the number of hours they’ll work in a year. The cost of labor for a salaried employee is their yearly salary divided by the number of hours they’ll work in a year.
Labor costs account for, on average, 68.3 percent of an employee’s yearly salary or wages. To figure out the labor cost percentage, multiply an employee’s total salary or wages by .683.
Add the full cost of what it takes an employee to create a product or complete a service. This includes their wages, taxes, and benefits. Then divide that total by the number of hours an employee works.
A direct labor rate is every cost that contributes to the creation of a product or service. This includes the cost of labor, payroll taxes, and benefits, but does not include the cost of managerial or support roles. Use the calculator above to determine an employee’s billable cost per hour.
To calculate the labor burden, add each employee’s wages, payroll taxes, and benefits to an employer’s annual overhead costs (building costs, property taxes, utilities, equipment, insurance, and benefits). Then divide that total by the employer’s number of employees.
A benefits package is worth about 30 percent of an employee’s salary. A benefits package includes not only health insurance, but worker’s compensation insurance, disability insurance, paid leave, retirement savings, and more.
Payroll taxes are first calculated according to your state, as it’s your state that determines the rate at which you’re taxed. Payroll taxes also include labor cost taxes, Social Security taxes, Medicare taxes, and state and federal unemployment taxes. Use the calculator above to determine the cost of payroll taxes in your state, per employee.
Benefits account for 31.7 percent of an employee’s total cost. An employee’s total salary and wages account for 68.3 percent of their total cost. Retirement and savings account for 5.4 percent of their total cost, according to the US Department of Labor’s June 2017 Employer Costs for Employee Compensation survey. Employers should also consider an employee’s overhead percentage when determining the employee’s pay.
How much an employer pays in taxes per employee depends on the employee’s wages. For example, an employer with only part-time employees who work half the year can expect to pay figures in the hundreds, per employee. Taxes include federal unemployment taxes, Social Security taxes, Medicare taxes, state unemployment taxes, and more. Use the calculator above to determine how much an employer pays in taxes per employee.
How much a company pays for employee health insurance depends on the size of the company. As mandated by the Affordable Care Act (ACA), companies with more than 50 full-time employees must offer a company health plan or pay a tax penalty. According to a 2015 Kaiser Family Foundation study, employers pay, on average, between $5,000 and $12,000 per employee, per year for health insurance.
*Disclaimer: Please refer to a professional tax, payroll, or financial advisor regarding specific employee costs and state and federal taxes and how they impact your business. TSheets does not recommend particular financial practices and leaves those decisions to the discretion of your organization.