# How to Calculate Employee Hourly Costs

Determining an employee's hourly cost is much more complicated than simply looking up their hourly wage rate. After all, a $10-per-hour employee costs you significantly more than $10. You also need to account for the payroll taxes you pay on their behalf, your Worker's Compensation insurance premiums and the cost of any benefits you give the employee. Only by looking at the sum of all of those costs can you truly estimate the hourly cost for a given worker.

## Step 1.

Calculate how many hours the employee will work in a year. You will use this to convert annual and monthly expenses to hourly values.

## Step 2.

Divide the annual cost of your employee's benefits by the number of hours they work. For example, if you pay $200 per month toward their health insurance and an additional $50 per month matching contribution to their 401k, your annual cost would be $3,000. If the employee works 2,000 hours per year, the hourly cost of their benefits would be $1.50.

## Step 3.

Multiply the employee's hourly rate of pay by the worker's compensation insurance premium rate. For instance, if the worker earns $15 per hour and has a worker's compensation premium rate of $2 per $100 of payroll, or 2 percent, they would have an hourly worker's compensation insurance premium of 30 cents.

## Step 4.

Calculate your payroll tax by multiplying the employee's rate of pay by the 7.65 percent FICA tax. For instance, the employee earning $15 per hour would cost you about $1.15 per hour in FICA contributions.

## Step 5.

Divide $56 by the number of hours that the employee will work to find your hourly contribution to federal unemployment insurance, frequently referred to as FUTA. If the employee will make less than $7,000 in a year, multiply their hourly rate by 0.008 instead. Taking the previous example of an employee making $15 per hour and working 2,000 hours per year, the hourly unemployment insurance would be 2.8 cents.

## Step 6.

Multiply your hourly wage by the percentage premiums for any state fees, taxes or insurance premiums which may apply where your business is located. For example, some states levy a charge for state unemployment insurance or for state disability insurance.

## Step 7.

Add all of the charges together to come up with a true hourly cost for an employee. Given the current example, you would add the $15 hourly wage with the $1.50 cost for the benefits, the 30 cent worker's comp premium, the $1.15 in FICA tax and the 2.8 cents in FUTA to find a total hourly cost of about $17.98.