Hiring your first employee is a major milestone—and a significant financial commitment. The total cost of an employee is substantially higher than their salary alone: you'll pay payroll taxes (7.65% minimum), workers' compensation insurance (rates vary by industry), unemployment insurance, and often benefits.
For most small businesses, total employment cost runs 125–140% of base salary. A $50,000/year employee actually costs $62,500–$70,000 when you include all employer obligations. Understanding these costs upfront helps you budget correctly and avoid cash flow surprises.
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Step-by-step workflow
Calculate total employee cost
Use the employee cost calculator to see the full financial picture: base salary, payroll taxes (FICA, FUTA, SUTA), workers' comp insurance, and estimated benefits. This is your real hiring budget.
Estimate workers' compensation insurance
Most states require workers' comp coverage as soon as you hire your first employee. Rates vary dramatically by industry—construction pays 5–10× more than office work. Get a premium estimate before hiring.
Understand payroll tax obligations
You'll pay 7.65% of wages for FICA (Social Security + Medicare), plus federal and state unemployment taxes. Payroll taxes are due on strict schedules—usually semi-weekly or monthly depending on your total payroll.
Model revenue impact
Before hiring, confirm the employee will generate enough incremental revenue (or cost savings) to cover their total cost plus overhead allocation. A good rule: new hires should generate 2–3× their total cost in value.
Hidden costs of hiring (beyond salary)
These employer-paid costs are often overlooked when budgeting for a new hire. Percentages are based on gross wages.
Common mistakes to avoid
Budgeting only for salary, not total cost
The most common hiring mistake is forgetting payroll taxes, insurance, and benefits. Always budget at minimum 125% of salary—and closer to 140% if you're offering health insurance or competitive PTO.
Misclassifying employees as contractors
The IRS and state agencies actively audit worker classification. Misclassifying employees as 1099 contractors to avoid payroll taxes can result in massive back taxes, penalties, and legal liability.
Not shopping workers' comp rates
Workers' comp premiums vary significantly by carrier and can be negotiated based on safety programs and claims history. Get 3–5 quotes before buying, and review annually.
Key financial considerations
- → Total employee cost is typically 1.25–1.4× base salary when you include payroll taxes, workers' comp, unemployment insurance, and benefits.
- → Workers' compensation insurance is required in most states as soon as you hire—rates vary dramatically by industry and job classification code.
- → Payroll taxes include FICA (7.65%), FUTA (0.6%), and SUTA (varies by state)—and must be deposited on strict schedules to avoid penalties.
- → Budget for these costs before making an offer. A $60K employee actually costs $75K–$84K all-in, and underestimating strains cash flow.
- → Model the revenue impact: will this hire generate 2–3× their total cost in incremental value? If not, delay the hire or improve your pricing.