Here's How Much Your Employees Actually Cost

If someone is hired at $50,000 per year, many owners immediately begin calculating whether the business can support an additional $50,000 in payroll. Unfortunately, payroll is only one piece of the equation, and it is actually shocking how much more it costs a business to hire an employee when you start taking into consideration the hard costs of the position. The moment an employee joins your team, a long list of additional expenses begins attaching itself to that role.

What makes this challenging is that most of these expenses are relatively small on their own. A software subscription here. A computer purchase there. A certification course six months later. Individually, they seem manageable. Collectively, they can add thousands of dollars to the true cost of a position.

This is one of the reasons I created my Cost of Labor Worksheet. I wanted business owners to be able to see exactly how much each employee costs the business. Instead of focusing only on salary, the worksheet visually shows every expense attached to the position so hiring decisions can be based on the true cost of the role rather than salary alone.

Step 1: Fill In The Position Title

The first step is identifying the position itself. This sounds simple, but many business owners skip this level of planning and jump straight into hiring when they feel overwhelmed. Instead, I encourage business owners to think strategically about what role actually needs to be filled. Is it an administrative position? A revenue-generating role? A technician? A manager? By naming the position first, you begin building intentionality into the hiring process instead of hiring based on frustration or urgency.

Step 2: Calculate The Base Compensation

Once the position is identified, the next step is determining the annual compensation. For full-time employees, this is typically their yearly salary. For part-time positions, you can calculate this by multiplying the hourly rate by the number of hours expected to be worked throughout the year. I also encourage business owners to think ahead when filling out this section. If you already know a raise is likely within the next year, build that into the calculation now. It is much easier to plan for future payroll expenses than it is to be surprised by them later.

Step 3: Add Employer Taxes and Workers Compensation

This is one of the most commonly overlooked costs of hiring. Employees cost more than their paycheck because employers are responsible for payroll taxes, workers compensation, and other required employment expenses. In my worksheet, I use a 15% multiplier as a starting point because it creates a simple estimate for planning purposes. Depending on your state, industry, and workers compensation rates, your actual percentage may be higher or lower. The goal is not to create a perfect number immediately. The goal is to put a place holder on the cost attached to an employee.

Steps 4 Through 12: Identify The Hidden Costs Of The Position

This section is where the worksheet starts calculating the costs that typically don’t get associated with an employee’s salary. Every position requires support, and those support costs are often forgotten during the hiring process. Depending on the role, this may include computers, software subscriptions, office supplies, uniforms, company vehicles, fuel reimbursement, cell phone plans, commissions, healthcare benefits, retirement contributions, professional development, certifications, conferences, travel expenses, or industry-specific equipment.

Many business owners look at these expenses individually and assume they are too small to matter. The reality is that each one represents another cost attached to the employee. While a $50 monthly software subscription may not seem significant by itself, multiple subscriptions across multiple employees can quickly add thousands of dollars to your annual labor costs.

This section of the worksheet is intentionally flexible because every business is different. A field technician will have different expenses than an executive assistant. A salesperson may have commissions and travel expenses that an office manager does not. The purpose is to create visibility so that every expense tied to the position is accounted for before the employee is hired.

What I love about this process is that it removes the guesswork. Instead of wondering whether the company can afford the employee, you begin seeing the actual investment and budgeting required to support them successfully. That clarity allows you to help the owners build stronger pricing, stronger revenue goals, and healthier cash reserves before payroll ever becomes a problem.

Final Thoughts from Your Favorite Accountant

The goal of the Cost of Labor Worksheet is not to scare business owners away from hiring. The goal is to help them hire from a position of confidence. When you understand the true cost of a position, you can help them build the revenue goals, cash reserves, and pricing strategies necessary to support that employee long term. Then the business can grow the revenue alongside them instead of having to take out loans over and over again just to cover payroll.

Before hiring the next employee, calculate the full cost of the position instead of focusing solely on salary. Understanding the complete financial picture will help make stronger decisions, build healthier cash reserves, and avoid cash flow surprises later.

Because at the end of the day, positive cash flow isn't luck, it's strategy. And it's my goal to make that strategy as simple as possible for you.

Download the Cost of Labor Worksheet here.