How Much Does an Employee Cost?

A hiring manager shakes the hand of a new employee he just hired.

There’s more to budgeting for a new hire than merely coming up with a competitive salary. In addition to wages, you’ll need to factor in benefits and payroll taxes, plus the costs of hiring and onboarding. So, how much does an employee cost?

All told, a new hire will likely cost you somewhere between 1.25 and 1.4 times the cost of their base salary. To get a basic idea of how much your next hire will cost, you can use an employee cost calculator or build a customized formula to determine the cost of hiring a new employee.

What Costs Do You Need to Calculate?

How much does an employee cost and how do you answer that question? To determine whether the additional revenue you expect to gain with a new hire will offset your investment you’ll need to pin down and factor in the following cost categories:

  • Hiring costs. This includes your internal labor costs for candidate recruiting and vetting, advertising for the role, background checks, and more.
  • Onboarding and training costs. This can range from basic on-the-job training to signing bonuses and relocation services.
  • Infrastructure costs. This consists of items like tech support and workspace.
  • Compensation and benefits. In addition to salary, you’ll need to calculate the costs of benefits like health insurance.
  • Taxes and other fees. You’ll need to factor in federally and state-mandated expenses such as unemployment insurance and payroll taxes.

Hiring Costs

Begin by estimating the expenditures needed to recruit for the role, the labor costs you will invest in vetting candidates, and the cost of infrastructure tools such as applicant tracking systems (ATS). Once all these costs are taken into account, the average hiring cost per employee comes to slightly more than $4,000. This includes labor costs for the time your internal staff will need to take away from their typical workload during the hiring process, which averages 42 days per hire across all sectors.

The first phase of expenditures focuses on recruitment. You’re likely to incur costs including fees for job listings and external recruitment agencies, travel costs for candidates, and investment in sourcing activities such as reaching out to community colleges, technical schools, and professional associations.

As you scale your hiring, your cost per hire should go down over time. Your costs should begin to dip below the $4,000 mark after investing in industry databases, professional association memberships, and job fair participation fees; scalable hiring solutions; and paying retainers for vendors who can conduct skills testing and background checks.

Onboarding and Training Costs

On average, new hires require slightly more than a week of on-the-job training at an average cost of just over $1,200 per employee, including paying for certifications, uniforms and protective gear, and compliance costs.

In competitive fields like medicine and tech, you might have to offer additional perks, such as signing bonuses, tuition loan repayment, and relocation expenses.

Infrastructure Costs

New hires may need tech such as smartphones, laptops, and software. Factor in the cost of their workspace and support staff costs such as HR, payroll, and legal services. Don’t forget to calculate the cost of perks such as subsidized meals, break rooms, and coffee, tea, and water.

If your new employee is going to work offsite, you may need to provide wireless service and IT support, or even an expense account to purchase office supplies.

Compensation and Benefits

Of all the categories that need to be considered as you aim to answer the question—how much does an employee cost?—total compensation will make up the bulk of your expenditures. This category will include two main types of expenses: monetary compensation and benefits.

Monetary compensation includes salary or hourly wages, shift differentials, overtime, bonuses, and commissions. Non-monetary benefits account for about 30% of most employees’ total compensation, with health insurance making up the costliest portion.

A new hire’s benefits package may also include:

  • Life insurance
  • 401(k)
  • Health and flexible savings accounts (HSAs and FSAs)
  • Childcare credits
  • Tuition and commuting reimbursement
  • Adoption assistance
  • Employee discounts
  • Stock options

In most cases, you’ll want to factor in the first six months of a new employee’s total compensation in determining return on investment. That’s because it is at this stage that a new hire’s productivity approaches 100% capacity.

Taxes and Other Fees

There are several federal, state, and in some cases, local employment taxes that need to be factored into the total cost of hiring a new employee.

The costliest employer taxes are those required by the Federal Insurance Contribution Act (FICA) to sustain the U.S. Medicare and Social Security trusts. Count on paying about 6.2% in Social Security taxes on compensation up to the federally determined base salary rate and 1.45% in Medicare taxes on all compensation. These rates and the base salary rate threshold are subject to change, so check with the Internal Revenue Service (IRS) to determine current rates.

Among the additional taxes, you need to factor into your payroll process include federal unemployment tax (FUT), state unemployment, workers’ compensation, and short- and long-term disability.

The Cost of a Bad Hire

If all of this sounds overwhelming and costly, it is. But you may not want to skimp on your hiring process to save money, especially at the recruitment and candidate vetting phase. A bad hire can undermine productivity, zap the energy and enthusiasm from those around them, and even prompt your most valued employees to start dusting off their resumes, leading to costly employee churn.

All told, employers can expect to lose about 30% of a bad hire’s first-year salary to make up for lost revenue, or an average of $14,000 per poor hiring decision.

When Is the Right Time to Invest in a New Hire?

Once you’ve answered the question, how much does an employee cost, you can determine whether you are ready to invest in a new hire by answering these two additional questions:

  1. Can you fulfill the need another way? You might be able to satisfy a growing customer base or increase productivity by leveraging tech solutions or increasing automation, contracting with an agency that provides the labor and expertise you are seeking, hiring contractors and freelance experts, or considering internal candidates.
  2. Will the position pay for itself, and then some? Once you factor in all the costs of adding a new employee to your operations, if that new position will pay for itself through added revenue or time freed up for your existing revenue-generating staff, then it probably makes sense to move forward.

Remember that return on investment for a new hire takes time. If, after you factor in all the costs above, you’re confident a new hire would begin boosting revenue for your company by that six-month mark, then it’s time to start writing that new job description.

Once You’ve Calculated the Cost of a New Hire, Learn How to Get the Most Out of Your Workforce

You’ve learned what goes into answering the question: How much does an employee cost? Now get more expert advice, the latest hiring news, management how-tos, and more.