Labor Cost Calculator
Calculate the true cost of hiring an employee — including benefits, payroll taxes, workers' comp, and overhead. Compare up to 5 employees side by side.
Default: 7.65% (FICA)
Varies by industry
Equipment, space, etc.
Track labor costs across your team
Stop guessing what your team really costs. tinyteam gives you real-time visibility into compensation, benefits, and total labor costs for every employee — with built-in payroll integrations.
Understanding the True Cost of an Employee
When you hire an employee at a $60,000 salary, the actual cost to your business is significantly higher — often between $75,000 and $84,000 per year. This gap between base compensation and total labor cost is what HR professionals call the "burden rate," and understanding it is essential for accurate budgeting, pricing, and workforce planning.
What Goes Into Total Labor Cost?
Total labor cost comprises several components beyond the employee's paycheck. Each adds a measurable percentage to your base compensation expense:
- Payroll Taxes (7.65%): Employers must match employee Social Security (6.2%) and Medicare (1.45%) contributions. This alone adds nearly 8 cents to every dollar of compensation.
- Health Insurance & Benefits (20–30%): The Bureau of Labor Statistics reports that benefits account for roughly 30% of total compensation costs for private industry workers. Health insurance is typically the largest single benefit expense.
- Workers' Compensation (0.5–5%): Required in nearly every state, rates vary dramatically by industry. Office workers might pay 0.5% while construction workers could pay 5% or more.
- Overhead (10–20%): Equipment, software licenses, office space, utilities, and other indirect costs associated with supporting each employee.
- Retirement Contributions: 401(k) matches, typically 3–6% of salary, represent another significant cost.
How to Calculate Your Burden Rate
The burden rate formula is straightforward: divide total annual labor cost by base salary. A burden rate of 1.35x means you spend $1.35 for every $1.00 in base compensation. Here is a practical example:
- Base salary: $60,000
- Payroll taxes (7.65%): $4,590
- Benefits (20%): $12,000
- Workers' comp (1.5%): $900
- Overhead (10%): $6,000
- Total annual cost: $83,490
- Burden rate: 1.39x
This means the true hourly cost of this employee — assuming 2,080 annual work hours — is approximately $40.14 per hour, not the $28.85 their base salary suggests.
Why Burden Rate Matters for Small Teams
For small businesses and startups, accurately understanding labor costs is critical for three reasons. First, it affects pricing — if you're billing clients for employee time, you need to charge above your true hourly cost to maintain margins. Second, it impacts hiring decisions — knowing the full cost helps you decide between hiring full-time employees, contractors, or part-time workers. Third, it enables accurate financial forecasting and runway calculations.
Industry Differences in Labor Burden
Labor burden rates vary significantly across industries. Technology companies typically see rates around 1.25x due to lower physical overhead and fewer safety-related costs. Manufacturing and construction companies often hit 1.40x or higher because of workers' compensation, safety equipment, and compliance costs. Healthcare organizations typically fall around 1.35x due to extensive benefits packages and regulatory requirements.
Understanding where your industry falls helps you benchmark your own costs and identify opportunities for optimization. If your burden rate significantly exceeds industry norms, it may be time to audit your benefits structure, negotiate better insurance rates, or explore remote work options to reduce overhead.
Reducing Labor Costs Without Cutting Pay
Smart labor cost management is not about paying less — it is about spending efficiently. Automating HR processes with tools like tinyteam can save 5–10 hours per week in administrative overhead. Offering remote or hybrid work arrangements reduces office space costs by 30–50%. Implementing wellness programs can lower health insurance premiums over time. And group purchasing for benefits, especially for small teams, can yield significant savings compared to individual plans.
Learn how tinyteam helps small teams manage compensation and labor costs effectively.
Frequently Asked Questions
What is the true cost of an employee?
The true cost of an employee goes far beyond their salary or hourly rate. It includes payroll taxes (Social Security and Medicare at 7.65%), health insurance and benefits (typically 20-30% of salary), workers' compensation insurance, retirement contributions, and overhead costs like equipment, software, and office space. On average, an employee costs 1.25 to 1.4 times their base salary.
What is a burden rate and how is it calculated?
A burden rate (or labor burden multiplier) is the ratio of total employee cost to base compensation. It's calculated by dividing total annual labor cost by the base salary. For example, if an employee earns $60,000 and their total cost is $81,000, the burden rate is 1.35x. This means for every dollar paid in base salary, the company actually spends $1.35.
What payroll taxes do employers pay?
In the US, employers pay 6.2% for Social Security (on wages up to $168,600 in 2024), 1.45% for Medicare (no cap), and federal and state unemployment taxes (FUTA/SUTA). The combined employer-side payroll tax rate is approximately 7.65% before unemployment taxes, which vary by state and employer history.
How much do employee benefits typically cost?
Employee benefits typically cost 20-40% of base salary. Health insurance is the largest component, averaging $7,900 per employee for single coverage and $22,400 for family coverage annually. Other common benefits include dental, vision, life insurance, disability insurance, 401(k) matching, and paid time off.
What overhead costs should I include in labor cost calculations?
Common overhead costs include office space or coworking fees, equipment and furniture, software licenses, IT infrastructure, training and development, recruiting costs, HR administration, and office supplies. These typically add 10-20% on top of base compensation, depending on industry and work arrangement.
How can I reduce labor costs without cutting salaries?
Strategies include offering remote work (reduces office overhead by 30-50%), using an HR platform like tinyteam to reduce administrative costs, negotiating group insurance rates, implementing wellness programs to reduce health costs, optimizing benefits packages based on employee preferences, and automating repetitive HR tasks.
