How Much Do Your Employees “Actually” Cost?

Look online and you’ll see plenty of guides telling you how much your employees “actually” cost. What does this “actually” usually include? Well, in addition to salary, there’s taxes (Social Security, Unemployment, Medicare), employee benefits, recruitment, space, equipment, and other sundry costs. Add those things up and you’ll have your employees’ “actual” cost.

So what’s the problem with that?

1. You know most of that stuff already.
2. It still doesn’t tell you what your employees actually cost.

In fact, what any employee really costs is a product of two things: the costs described above, and the amount of work they get done. Think about it: a $40,000 employee who gets 2 hours of billable work done each day is going to cost you much more than a $100,000 employee who gets 7 hours of billable work done each day.

Similarly, there are a ton of hidden costs that most calculators don’t account for. Let’s crunch some numbers.

Base Cost (the typical “actual cost”)

Let’s assume an employee with an annual salary of $60,000. On paper, that’s $30 per hour.

Now, add taxes: 6.2% SSC, 1.45% Medicare, 6.2% Unemployment on the first $7000. Add health care (we’ll estimate the national average, 83% of premiums). Add disability. Add 401(k) contributions (typically 6% of an employee’s salary), add rent, computer, office supplies, snacks, and other benefits (we’ll call that 10% of yearly salary).

Now let’s factor in 2 weeks of vacation, 10 public holidays (in the US), and 8 days of paid sick leave. That leaves 46 weeks of work.

80,288 / 46 = $1,745 per week.

Divide by 40 hours per week:

1745 / 40 = $43.63 per hour.

So while your employee might be getting paid $30 per hour, their “actual” cost is $43.63 per hour. Quite a difference. If you’re charging clients to cover that rate, you’ll have to charge clients more than you might think.

Hidden “Actual Costs”

Here’s the catch: that $43.63 means an employee is actually working all the time. When things get in the way of work, they raise that hourly rate, sometimes dramatically.

Let’s look at some of the things that can really raise an employee’s cost to you.

(NOTE: we won’t count break times as times not working, since, as has been well-documented, breaks are necessary for doing good work.)

1. Meetings

Sure, meetings are important. But most meetings go on for way too long. If you have five employees all making the amount described above, and each of them spends 2 hours per week in unnecessary meetings, that’s costing you $17,000 per year! Invest in a reliable time tracker to find out exactly how much time is being drained away in meetings.

Fortunately, there are some simple fixes: standing-only meetings; being clear about meeting purposes; strict scheduling (45 minute meetings should end after 45 minutes!). But it’s hard to cut out all the fat. If we add 2 hours of unnecessary meetings per week to our hypothetical employee, we get:

NEW HOURLY RATE: $45.93/hour.

2. Re-Do’s

We all make mistakes. You too. So what happens when your employees have to spend unpaid time fixing things? That’s right: their costs to you go up once again.

This one is hard to calculate in advance, so let’s add another 10% of their yearly salary.

NEW HOURLY RATE: $49.36

3. Your time

Don’t ignore this one. Employees will inevitably take time from your schedule — time when you could be earning money for the company. Let’s say you make $80,000 a year, and, for simplicity’s sake, you work 2,000 hours per year. That’s $40 per hour. If you have to spend 2 hours per week with each employee (training, guiding, talking, or — ouch — letting them go), that’s another $80 per week.

NEW HOURLY RATE: $51.47

Safety and Health

This certainly depends on the field in which you work, but workplace accidents can keep people out of work, easily dropping your bottom line. Similarly, health-related issues can keep employees sicker for longer than they should be. Ever wondered if you should give more health-related benefits to your employees? The time to start is today.

Let’s be conservative, and say an employee ends up missing two extra days of work per year due to unforeseen health or safety issues.

NEW HOURLY RATE: $54.93

Billing Rates, Reconsidered

So your employee is making what feels like $30 per hour, but once you consider all these costs, you’re paying almost $55 per hour. If you have particularly expensive overhead costs (accounting, rent, HR), you can raise that number even further. What does this tell us?

If you’re billing a client for your employee, you need to bill at more than double their rate, just to break even.

A better plan? Bill at three times their rate. That ensures that your employee makes money and your business makes money.

Because if there are “actual costs” and actual costs, you want to make sure you’re earning actual revenue, not just “actual revenue.”