Payroll Cost Calculator

The True Cost of an Employee: What Employers Actually Pay

A complete breakdown of what it costs to hire a full-time employee in the US — salary, payroll taxes, benefits, overhead — and the 1.25-1.4x rule of thumb.

When a founder says "I can't afford to hire," they often mean they're comparing the salary to their cash position. But the actual cost of an employee is 25–40% higher than the salary. This guide breaks down exactly where that extra cost comes from.

The components of total employer cost

1. Base salary — the number in the offer letter

2. Payroll taxes (mandatory): - FICA Social Security: 6.2% of wages (up to wage base) - FICA Medicare: 1.45% of all wages - FUTA: effectively ~$42/employee/year after state credit - SUTA: 0.5–5%+ of wages up to state wage base

3. Benefits (expected for full-time): - Health insurance: $500–$2,000/month employer contribution - 401(k) match: typically 3–5% of salary - Dental + vision: $50–$150/month - Paid time off: implicit cost of unworked time (15–25 days/year)

4. Overhead (not always calculated explicitly): - Equipment: $1,500–$5,000 for laptop + accessories - Software licenses: $50–$500/month per employee - Office space: $500–$3,000/month per seat (if applicable) - Recruiting cost: typically 15–25% of first-year salary (one-time)

The 1.25–1.40× rule for most US employees

Most employers use 1.25–1.40× as the overhead multiplier for budgeting purposes.

The 1.35–1.40× range is more realistic for roles with comprehensive benefits packages.

Contractor vs employee cost

1099 contractors don't trigger payroll taxes or benefits obligations. But contractors typically charge 40–60% more per hour to compensate.

Rule of thumb: if you need someone for less than 18 months, a contractor may be cheaper. If longer, a full-time employee with employer cost efficiency usually wins.

Use the Payroll Cost Calculator to calculate the exact total cost for any salary and benefits scenario.

↑ Back to calculator

Employer Payroll Taxes Explained: FICA, FUTA, and SUTA

A plain-English guide to the payroll taxes US employers pay — FICA, FUTA, and SUTA — with rates, wage bases, and how to minimize legal obligations.

Every US employer pays three categories of payroll taxes on top of the employee's wage. These are mandatory, separate from income tax withholding, and paid entirely by the employer (not deducted from the employee's paycheck).

FICA — Federal Insurance Contributions Act

FICA funds Social Security and Medicare.

For a $120,000 salary: 7.65% × $120,000 = $9,180/year in employer FICA.

Note: employees also pay 7.65% FICA (matched by employer). For a $120k employee, total FICA (both sides) = $18,360/year.

FUTA — Federal Unemployment Tax Act

FUTA funds federal unemployment insurance. - Statutory rate: 6.0% on first $7,000 of each employee's wages - After state unemployment tax credit: 0.6% effective rate - Maximum per employee: $7,000 × 0.6% = $42/year

Most employers pay the effective 0.6% rate. Credit is lost if you're delinquent on state unemployment taxes.

SUTA — State Unemployment Tax Act

SUTA is the state-level unemployment tax. Rates vary widely:

Rates change with your "experience rating" — employers with fewer unemployment claims get lower rates after 3+ years in business.

Total payroll tax example

Employee in California with $120,000 salary, new employer: - FICA: $9,180 - FUTA: $42 - SUTA: $7,000 × 3.4% = $238 - Total employer payroll taxes: $9,460 (7.9% of salary)

Use the Payroll Cost Calculator to calculate total payroll taxes and employer cost for any salary and state.

↑ Back to calculator

Employee vs Contractor Cost Comparison: The Real Math

A financial comparison of hiring a full-time employee vs a 1099 contractor — with the break-even calculation and scenarios where each is cheaper.

The employee vs contractor decision involves more than hourly rate comparison. Employees cost more per hour on paper (employer overhead), but contractors cost more per hour in billing. The break-even depends on role, duration, and benefits cost.

The employee cost model

Full-time employee at $120,000 salary: - Salary: $120,000 - Employer payroll taxes: ~$9,500 - Health insurance: ~$12,000 (employer contribution) - 401k match (4%): $4,800 - Other benefits: ~$2,000 - Total: ~$148,300/year = $71.30/hour (on 2,080 work hours)

But effective working hours are lower. With 15 days PTO + 10 holidays: - 2,080 total − 200 PTO/holiday = 1,880 effective working hours - Effective cost: ~$78.90/hour of productive work

The contractor cost model

1099 contractor at $95/hour: - No payroll taxes (saves ~8% vs employee) - No benefits - No PTO - No equity vesting - $95 × 2,000 hours = $190,000/year (full-time equivalent)

The break-even calculation

Break-even hourly rate = Total employee cost / Hours worked

At $148,300 total and 2,000 billable hours: break-even = $74.15/hour.

If a contractor quotes above $74/hour, the employee is cheaper (long-term, full-time). If the contractor quotes below $74/hour, the contractor is cheaper.

When contractors are the better choice

1. Short duration (< 12–18 months): employee setup costs (recruiting, onboarding, severance) don't justify employment for shorter engagements.

2. Specific project: a 3-month website redesign doesn't need a permanent hire.

3. Specialized skills: niche expertise that you'll use for a defined period.

4. International work: contractors in lower-cost countries can deliver high quality at significantly lower fully-loaded cost.

When employees are the better choice

1. Ongoing role: if you'll need someone continuously for 2+ years, the employment model becomes more cost-efficient.

2. Core IP work: employees automatically assign IP to the employer. Contractors require explicit IP assignment clauses.

3. Culture and management: employees are more integrated and easier to manage.

Use the Payroll Cost Calculator to calculate the exact employer cost for any salary scenario.

↑ Back to calculator