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How Much Does An Employee Cost? Deel’s Employee Cost Calculator

Deel’s employee calculator helps you determine how much an employee costs, anywhere around the world.

Stefana Zaric
Written by Stefana Zaric
March 2, 2022
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Determining the total cost of an employee has always been a bit confusing. The total cost depends on factors like statutory employee benefits and company perks on top of the candidate’s salary.

These days, the total employee cost is even more complicated due to the rise of international hiring and remote work. Hiring full-time, salaried employees to work virtually from a different country introduces unique expenses and opportunities to save costs.

Using an employee cost calculator allows hiring managers to work out the total cost of hiring an employee, such as Deel’s employee cost calculator, which gives you a ballpark figure to hire an employee anywhere in the world.

As a guideline, the actual cost of an employee is 1.25 to 1.4 times their base salary. So, if an employee’s annual salary is $50,000, then their total cost to the company is actually between $62,500 to $70,000 per year. 

Keep reading to understand how much an employee costs, empowering you to make a more precise estimate on your own. 

Breakdown of your employee costs

The total employee cost consists of a lot more than their annual salary. From mandatory benefits to fringe benefits, there are a few key factors to consider that add to the true cost to the company. 

Payroll taxes

Payroll taxes are fully deductible but the amount still needs to be factored into the employee cost. Payroll taxes include employer share of Federal Insurance Contributions Act (FICA), federal unemployment tax (FUTA), and state unemployment tax. 

These figures are outlined by the IRS and your state revenue department. Check out our guide on payroll taxes to understand their role in the total cost.

Medicare

In the US, the cost of Medicare falls under the FICA umbrella. Employers split Medicare taxes with employees who earn hourly wages, salaries, or self-employment income to fund the country’s healthcare. Employees who pay their employees medicare cover half of the required 2.9% tax, meaning each party pays 1.45% of the employee’s wages.

Social security

FICA also includes social security taxes. As of 2022, employers pay 6.25% of an employee’s taxable wages per year for social security. 

These costs only apply to taxable wages up to $137,700. If you crunch the numbers, that means the maximum an employer will have to pay in social security taxes is $8,239.80 (as of 2020) per employee. 

The combination of Medicare and social security taxes brings the total FICA cost to 7.65% of taxable wages per employee. The good news is that these expenses are fully tax-deductible. 

Worker compensation

Worker’s compensation is another required cost and the exact amount will depend on the business’s industry. Essentially, the higher the risk of injury, the more worker’s compensation the employer must pay per employee. 

State regulations also impact the worker’s compensation amount. The best way to understand the total amount is by using an assigned rate per every $100 of the payroll.

For example, the cost of someone working in a clerical position will be $0.12 per $100, bringing the annual cost to $33,60 for annual pay of $28,000. A more dangerous job, like a painter, costs $8.99 per $100, bringing the total employee cost to $2,876.80 per year for an annual salary of $32,000.

Insurance coverage

The cost of health insurance depends on the health plan that you choose, ranging from single coverage to family coverage, etc. 

A 2021 Kaiser Family Foundation report provided ballpark figures for small businesses providing health insurance to employees. The average annual health insurance premium for single coverage was $7,813 and employers contributed $6,485 (83%). Family coverage averaged $21,804 of which employers contributed $13,737 (63%).

Additional insurance includes dental insurance, life insurance, disability insurance, and more. Keep in mind these numbers will change for international employees since each country has its own mandatory benefits. Check out our guide on global employee benefits to learn more about legal requirements worldwide.

Paid time off

PTO includes sick days and vacation leave, during which the employer pays the employee without receiving work in exchange. The total cost to the company will be the total number of PTO hours multiplied by the employee’s hourly rate.

Consider that the average PTO in the United States private sector is 10 days, not including paid holidays and sick days. Using an average calculation of $29 per hour and eight hours in the workday, PTO equates to $2,320 per year. 

This figure varies around the world. Brazil, for example, offers an average of 30 days of PTO.

Retirement and pension schemes

Another common benefit is retirement and pension plans. Many employers match their employee’s 401(k) contributions. While retirement contributions are non-mandatory benefits and not required under federal law, many employers offer them to attract and retain talent. 

The total cost depends on the company’s policy, but a recent report revealed the average employer pays 4.3% in a 401(k) match.

Overhead costs

Standard overhead costs also play a role in the total cost per employee. Overhead costs vary wildly depending on the number of employees and the location of the business, notably including:

  • Rent of office space (which varies enormously by location)
  • Utilities and maintenance of office space
  • Supplies and specialized equipment needed to do the job
  • Basic operating costs such as payroll

One of the largest sources of overhead cost (for non-remote teams) is office space. The average listing rate of commercial office space in Manhattan, for example, is about $86 per square foot, per year.

Office supplies are another seemingly small expense that add up. For example, a recent study revealed that an office with one to four employees spends over $1,800 per employee for office supplies, furniture, tech equipment and break-room products. 

Top tip: Encouraging remote work and telecommuting are effective ways to lower the overhead cost associated with an employee. 

Hiring and onboarding cost

The hiring and onboarding process costs money, which is why it’s so important to reduce turnover rate. Internal recruiting costs include recruiting software, the hiring team’s time, fees for the job posting, and background checks (which cost between $10 to $20). 

Depending on your hiring methods, you may also incur an external recruiter’s hiring fee, which can range between 15% to 25% of the employee’s base salary. Another consideration is the difference between local and global recruiting costs. 

Onboarding a new hire also costs money because the new hire takes time to ramp up and contribute to the business. Consider a rough productivity timeline until a new recruit ramps up: 

  • Weeks 1 to 4: after training is completed, new employees operate at a 25% productivity level, costing the company 75% of the employee’s wages
  • Weeks 5 to 8: operating at 50% productivity level, costing the company 50% of the employee’s wages 
  • Weeks 9 to 12 - operating at 25% productivity level, costing the company 25% of the employee’s wages
  • After week 12 - operating at 100% productivity, at which point the company breaks even

Situational variables that impact total employee costs

Understanding the breakdown of employee costs is just the tip of the iceberg. Expenses are very seldom equal from one company to the next. 

For example, the cost of onboarding remote employees will depend on the speed of onboarding, the availability of training material, and the possibility of sponsoring an in-person meet-and-greet. Even costs with fixed rates, such as the 1.45% of Medicare, depend on the employee’s wage.

The following variables play a key role in total employee costs:

Location

The location of your business has a huge sway over the cost of an employee, from the state’s legal requirements (such as taxes) to the cost of living and market supply.

A recent study revealed that California is one of the most expensive states for running a business. California workers have the nation's ninth-highest average annual wage (of $47,290 per year) and the highest electricity prices.

Hiring remote workers can lower location-dependent costs. For example, employees don’t have to commute and then claim back the cost from the company. In addition, the talent pool can extend beyond the border which increases the chance of finding skilled talent at competitive prices.

Industry

Each industry has its own guidelines on which benefits to offer and costs to consider. For example, manufacturing typically offers greater insurance coverage as the risk of injury is higher. Highly administrative jobs need to consider office supplies such as stationery, printing machines, and ink.  

Market conditions

Just as the retail market fluctuates from a buyer’s market to a seller’s market, the business market swings between an employer’s market and a candidate’s market. 

In an employer’s market, the costs of hiring skilled candidates are a lot lower. In a candidate’s market, the cost of securing talent may be higher, with competitive compensation packages and benefits to consider. 

Company size and turnover rate

It’s possible to lower the overhead cost per employee with a large staff. For example, the cost of payroll software may stay the same if you have 100 employees vs. 150 employees. Larger companies therefore lower the cost per employee. 

Another factor to consider is the turnover rate of a company. The impact of a high turnover is extreme, since hiring and onboarding costs are so high. Companies wishing to save money on the cost of employees should invest in programs (like perks, talent development, and work-life balance) to incentivize employees to stay.

Role

The role the employee plays in the company has a direct impact on their compensation package. Junior hires offer less experience and therefore cost the company less when compared to senior and high-level roles.

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How do you calculate the real cost of an employee?

One of the best ways to measure the cost of an employee is to use an employee costs calculator

Deel’s employee calculator helps employees and hiring managers gauge an accurate cost per employee. Considerations include the position in the company, the country’s location, and a gross salary using a specific currency. 

Deel’s software is being used in more than 150 countries, helping businesses grow remote and international teams effortlessly. Understanding the total cost of an employee makes it easier to manage your budget and create an effective compensation strategy for remote workers.

The costs calculator factors in:

  • Average number of hours worked per employee per week (and year)
  • Employee hourly rate (without taxes or overhead)
  • Annual overheads, including building costs, property taxes, utilities, equipment and supplies, insurance, benefits, and number of employees
  • Payroll taxes per employee including social security tax, Medicare tax, and state unemployment tax
  • Location of the employee
  • Position of the employee

Deel also offers a salary insights feature, which helps you get an idea for fair, competitive salary offers to attract top talent in any country on the globe.

Ways to decrease employee costs

There are practical and effective ways to decrease employee costs without compromising employee wellness. 

Hire on an international level

Globalized workforces are becoming increasingly popular for various reasons. By broadening exposure and shifting toward an integrated world economy, businesses are able to share culture, generate new ideas, and innovate the business. 

Hiring international teams also offers its own financial perks. For example, hiring internationally opens the door to recruiting talent from countries with a lower cost of living, allowing the company to pay lower salaries. Of course, this can quickly verge on exploitation. Be careful not to lowball foreign employees as a way to underpay workers.

Top tip: make sure you comply with local laws when paying international employees.

Encourage remote work

The pandemic has fueled the rise of remote work and the subsequent development of digital tools suggests that the remote work lifestyle is here to stay. In the process, it has opened up many opportunities for companies to cut expenses.

Global Workplace Analytics suggests that companies can save up to $11,000 per employee each year by allowing their employees to work remotely at least 50% of the time. This figure factors in productivity levels, lower real estate costs, reduced absenteeism, and turnover.

One of the most obvious ways that remote work cuts costs is by reducing rent for office space. In some instances, stipends are required to subsidize internet, office supplies, and equipment for remote workers. But overall, overhead decreases dramatically.

Prioritize efficient tools and processes

Creating an efficient system ensures optimal productivity and cuts the cost of lost time. Various time management tools and software can streamline labor hours and maximize value for money.

Certain software helps optimize staff efficiency and cross-referencing hours worked with the employees on a shift, offering valuable insight on where to cut back.

Other automation tools, such as integrated payroll tools, also reduce effort and free employees to work on more pertinent tasks that can help the business grow.

Adjust voluntary benefits to be cost-effective

Competitive packages don’t need to impact employee costs in a dramatic way. Take the time to review the voluntary benefits package that you offer, and consider where small adjustments can be such as choosing plans that have higher deductibles or converting pension plans to profit-sharing plans. 

Analyze employee use of programs and cut back on programs that are not receiving engagement, such as a subsidized gym membership. 

Use Deel to reduce employee costs  

An employee’s total cost is around 1.25 to 1.4 times their salary due to taxes, insurance, overheads, and more. However, no article can give an exact number as the final cost depends on so many factors. Many of these factors change as you hire new roles in different locations. Deel is your partner for all things hiring and employee compensation. We help you stay compliant and provide cost-effective perks.

Deel makes growing remote and international teams effortless. Ready to get started?

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