How it works
True cost = wages + employer Social Security and Medicare (7.65%) + federal unemployment (0.6% of the first $7,000) + state unemployment + workers’ comp + benefits + payroll and one-time costs
Pays for itself when the revenue from their billable hours, minus supplies and other job costs, is more than the true cost.
Employer Social Security (6.2%) applies to wages up to $184,500 in 2026; Medicare (1.45%) has no cap. Federal unemployment is 6.0% of the first $7,000, usually reduced to 0.6% by the credit for paying state unemployment on time; employers in credit-reduction states pay more.
A worked example
A cleaning company hires a cleaner at $17 an hour, 30 hours a week, all year: $26,520 in wages. Employer payroll taxes add $2,071, state unemployment $300, workers’ comp $663, payroll software $480 and first-year hiring and gear $600. The true cost is $30,634, about 16% over wages.
She works on paid jobs 24 of her 30 hours, billed at $45 an hour: $56,160 a year. After 10% for supplies, that’s $50,544, so the hire adds about $19,910 a year. She needs about 14.5 billable hours a week to cover her cost.
Common mistakes
- Budgeting only the wage. Payroll taxes, insurance and time off add real money.
- Assuming every paid hour is billable. Drive time between jobs is paid work under federal law but earns nothing.
- Calling an employee a contractor to skip these costs. If you control how, when and where they work, they are very likely an employee.
What this doesn’t tell you
Planning estimate only, not payroll or legal advice. It doesn't include your state's other payroll taxes, local taxes, overtime, paid-leave laws or the owner time spent managing. Workers' comp and unemployment rates depend on your state, your industry and your history; get real quotes before you hire.
Related calculators
Go deeper: 15 Numbers Every Small Business Owner Should Know, from The Groundwork Review.
Anticipated Questions
How much does an employee really cost on top of wages?
It depends on your state, your industry and what benefits you offer. Payroll taxes, unemployment insurance and workers' comp come with every hire; health insurance and paid leave add more. Enter your own numbers above to see your figure.
Do I have to carry workers' comp?
Most states require it once you have employees, though some exempt very small employers or certain jobs. Check your state's rules before the first shift.
Is a 1099 contractor cheaper?
On paper, yes: no payroll taxes or workers' comp. But the label depends on the work, not your preference. A worker who follows your schedule, uses your supplies and does the core work of your business is usually an employee.
When am I ready to hire?
When the work is steady, not when one week is busy; when this calculator shows the hire paying for itself at a realistic number of billable hours; and when you have a few weeks of payroll in the bank.
Sources
- IRS Publication 15 (Circular E), Employer's Tax Guide
- IRS: Federal unemployment (FUTA) tax
- Social Security Administration: 2026 contribution and benefit base ($184,500)
- U.S. Department of Labor: Wages and the Fair Labor Standards Act
Last reviewed October 19, 2026. How our calculators work. General information for planning, not legal, tax or financial advice. Found an error? Email info@groundworkbusinessadvisory.com.
