Employee cost is one of the key factors that a business should consider strictly. At the time of hiring a new employee, an employer has to consider many factors. This is because these factors can increase the overall pay of employees, which can be sometimes more than the budget an employer decides.
In such circumstances, calculating the cost of hiring an employee before actual hiring can be beneficial. Doing this can help employers in deciding whether or not the new hirings are fitting to their financial range.
This article is written to provide help in estimating the employee cost. Plus, it will also provide useful information about the components, formulas, and factors influencing the cost of employees.
“It is the total cost an employer spends on an employee.”
Employee cost varies significantly across individuals. This is primarily due to differences in wage rates and the benefits packages offered to employees based on their roles and responsibilities.
Typically, a true employee cost is somehow between 1.25 to 1.4 times the basic salary of the worker.
Employee cost helps businesses to make informed decisions related to resource allocation, overall financial performance, and budgeting. Additionally, it refers to a major portion of finances in a company. It can impact profitability directly and provide insights into staffing levels.
In short, calculating employment costs can help businesses decide the hiring criteria as per the budget.
There are mainly two main components of the cost of an employee, which include:
This includes:
✅ Base Salary: The foundational fixed pay.
✅ Bonuses and Incentives: Performance-based rewards.
✅ Overtime Pay: Compensation for exceeding regular working hours.
This includes:
✅ Taxes: Such as Social Security, Medical insurance, and unemployment insurance contributions.
✅ Health Insurance Premiums: Refers to the health coverage costs that are subjected to the employer.
✅ Retirement Plan Contributions: These are also due on the employer side, such as contributions to plans like pensions and 401(k).
✅ Professional Development: Includes expenses related to the employee growth and training modules.
✅ Other Benefits: These might include stock options, gym allowance, and other on-site facilities offered to the employees.
You can perform employee cost calculation by using two different ways, which include:
Total Employee Cost = Base Salary + Payroll Taxes + Benefits + Additional Costs
In case when employers have to estimate the cost of hundreds or thousands of employees at a moment, using an employee cost calculator can provide help. The tool considers all the factors that are covered in the employee cost formula and gives an instant calculation for hiring an employee.
The cost of an employee is influenced by many factors including the following:
Overhead expenses are connected to the overall operations running in a business. However, they are not directly connected to a specific product or service provided by a business. It covers rent, utilities, and the cost of equipment maintenance.
Companies allocate these costs to multiple departments, based on many factors like machine hours, labor hours, overall revenue, and square footage of the property.
While expenses like employee computers and cars are essential for work, they are generally considered direct costs, as they are specifically linked to individual employees' productivity.
Health insurance premiums can affect employment costs in a varying range. Most of the time, companies that have less than 50 employees are not bound to health insurance of employees.
On the other hand, those with more than 50 employees are legally bound to do this. Plus, it should also be noted that most employers are supposed to pay half of the insurance premiums. The insurance might be the same for all, but other values like wage rate and other benefits can change the cost from one employee to the other.
The residence location of the employee has a heavy impact on employment costs. This is because labor laws and benefits ratio differ from one state to another.
Example: In Quebec (Canada), the Statutory Pension Tax was recorded at 12.8% of the employee pay and was applicable to the pay range CAD 3,500 to CAD 66,600. But for other states, this tax percentage was recorded to be 5.95% for the same wage rate.
This is another factor that is directly concerned with the cost of an employee.
Example: A junior content writer working in New York requires more salary than a junior content writer working in any other state of the USA. This way, it can heavily impact employee costs.
Every company or employer wants to hire top talent. And the market conditions also impact the cost of hiring these top talents. For example, in an employer-driven market, the cost of an employee is relatively less. Contrary to this, it is much higher in an employee-driven market.
Here comes the barrier between experienced and fresh candidates. An entry-level employee has basic pay with no additional benefits offered. On the other hand, an experienced employee receives multiple supplementary benefits along with a basic salary and other perks. This can subsequently increase the cost of employees.
Reducing employment costs can lead to saved finances, which can be used for the accomplishment of other operations. And this is how it can be done!
Offer good salaries to experienced employees so that they do not leave, creating space for new hires that can be expensive.
Train employees to play multiple roles in your company, which can reduce the need for hiring new employees.
Analyze and separate out those tasks which can be completde with outsourcing, thereby decreasing the overall employee cost.
Instead of offering 2 weeks paid vacation and 2 weeks paid sick leave, offer a holiday package of only 3 weeks per year, no matter how employees use them.
Where the gross salary is the amount an employee receives without any deductions, employee costs refer to the cost of retaining employee in a company.
You can either use the employment costs formula or calculator to calculate your employe cost.
↪ Employment costs index
