How Much Does an Employee Cost?

Determining the total cost of an employee depends on several factors, such as salary, statutory employee benefits, taxes, and company perks. Before we explain these costs in more detail, business owners need to understand some additional variables that impact the actual cost of an employee.

What factors impact the cost of an employee? 

Location

Full-time employees are protected by minimum wage laws and are entitled to mandatory benefits in the jurisdictions where they have residency. For example, in Bulgaria, every employee must receive a minimum wage of $382.77 per month and contributions to the state-run pension and healthcare system. 

Choosing a compensation strategy gets complicated when employees are scattered across countries and continents. Check out our Guide to Employee Compensation Strategies to discover the best approach for your company.

Industry 

Different industries entail distinct employee costs. For example, manufacturing employers must typically provide employees with greater insurance coverage as the risk of injury is higher. In contrast, administrative employers must consider the cost of providing each employee with office supplies such as stationery, printers, and ink.

Market conditions

The health of the labor market can affect the cost of employees. For example, the cost of hiring skilled candidates is much lower in a market with more qualified candidates than job openings. However, if there are talent shortages, the cost of employees will increase as companies are forced to offer more attractive compensation packages to draw and retain the best talent. 

Turnover rate

Companies with high turnover rates must factor in higher costs to recruit and retain new candidates. Investing in talent development and improving work-life balance can incentivize employees to stay with a company for longer.

Company size 

A larger company will have higher overhead costs overall, but the average cost per employee will be lower. On the other hand, a smaller company will have lower overhead costs but a higher cost per employee. This discrepancy is because companies with more employees buy equipment, software, and supplies in bulk, and bulk pricing often means that individual items are lower. 

Headcount planning

Companies looking to hire senior and high-level roles will need to create higher compensation packages than those looking to hire less experienced junior hires.

Employee costs

Keep reading to understand the costs of taking on a new employee.

Onboarding and recruiting costs

Depending on your hiring methods, employers must factor in the cost of: 

• Hiring external recruiters
• Job posting fees
• Background checks
• Administration
• Training and orientation
  
  

Compensation costs

An employee’s base salary is the most significant part of the total employee cost. Companies must consider the industry, labor market, experience level, and minimum wage laws where the employee is a resident to offer a fair and competitive annual salary.

Deel’s Global Salary Insights Tool can help you determine competitive salaries for top talent worldwide.

Mandatory benefits costs 

Mandatory benefits, also known as statutory benefits, are those employers must provide to their full-time employees by law. These required benefits differ by county and jurisdiction but can include the following: 

• Retirement plans
• Paid time off (PTO)
• Worker’s compensation insurance
• Unemployment insurance
• Disability insurance
• Health insurance
• Parental leave
• Sick pay 

Non-mandatory benefits costs 

Non-mandatory benefits are employee perks that are not a legal requirement, such as gym memberships, childcare, and life insurance. Companies have increasingly added to their non-mandatory benefits in the past few years to stand out from their competitors and attract the best talent. These perks improve employees’ quality of life and demonstrate a company’s investment in their teams.

Tax costs

In most countries, an employer must withhold certain payroll taxes from an employee’s wages and pay the employer’s share of these taxes. Payroll taxes are often fully deductible, but the amount still needs to be factored into the employee cost. 
 
In the US, payroll taxes include the employer’s share of the Federal Insurance Contributions Act (FICA), Federal Unemployment Tax (FUTA), and state unemployment tax. The Internal Revenue Service (IRS) and the state revenue department set these figures. 
 
Check out our guide to payroll taxes to understand their role in the total cost of an employee.

Overhead costs

Standard overhead costs also play a role in the average cost per employee. Overhead costs vary depending on the number of employees and the location of the business. They typically include:

• Rental fees for the office space
• Utilities and maintenance of the office space
• Supplies and specialized equipment needed to complete work
• Payroll costs and other standard operating expenses
  
  

Office space costs around $300 per month per employee. Yet, your monthly office space cost could be over $1,230 per person in high-cost areas like San Francisco or New York.
 
Office supplies are another seemingly small expense that adds up. You might spend anywhere from $200 to $1,000 per month (per employee) on office supplies, furniture, tech equipment, and breakroom products. 

Use an employee cost calculator 

Deel’s employee calculator helps hiring managers gauge the real cost per new hire. Considerations include the position in the company, the country’s location, and a gross salary using a specific currency. 
 
The calculator factors in:

• The 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 cost and taxes per employee, including Social Security tax, Medicare tax, and state unemployment tax
• Location of the employee
• Position of the employee
  
  

If you want to calculate labor costs without factoring in taxes or overhead costs, follow this formula: Employee hourly rate x annual hours worked = labor costs.
 
Say your employee’s rate is $45 per hour, and they work 1,801 hours per year, the US average of 37.5 hours per week. The cost calculation would be $45 x 1,801 = $81,045 labor costs.

Ways to reduce employee costs

There are practical and effective ways to reduce employee costs without compromising on quality hires or the employee experience: 

Hire on an international level

Salary expectations are often lower in countries where the cost of living is lower, enabling companies that hire globally to save. 
 
However, hiring abroad should not be a source of “cheap labor.” Companies should always provide a salary or compensation that honors workers’ qualifications and provides a high quality of life. You should pay a competitive price if you’re looking for the best talent to rival your local market.
 
Use Deel’s Global Employment Comparison Tool to instantly compare employment data from over 80 countries and find the best country for your next hire.

Encourage remote work 

The rise of remote work 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 is based on increased productivity levels, lower real estate costs, and reduced absenteeism and turnover.
 
Providing stipends is a great way to help remote employees subsidize internet, office supplies, and equipment while dramatically decreasing overhead costs.

Prioritize efficient tools and processes

Various time tracking and management tools can optimize team efficiency and productivity while providing management with insightful data.
 
Automation software, such as integrated payroll tools, reduce effort and frees employees to work on more pertinent tasks that can help the business grow.

Adjust voluntary benefits

Review your voluntary benefits packages and consider where you can make small adjustments to cut costs. For example, if providing health insurance, choose plans with higher deductibles or convert pension plans to profit-sharing plans. 
 
Analyze employees’ use of programs and cut back on programs that don’t receive engagement.

Reduce employer costs with Deel

Are you facing an unexpected increase in workload? Need to hire quickly and economically? With Deel, you can hire talent from countries worldwide cost-effectively, in minutes, and with minimal effort. The entire employment process gets handled by local hiring experts, so you can focus on building your best business.

Read more about how Deel works or book a demo to see how we can help you and your team grow.