Business Calculators
Employee Cost Calculator
Turn a salary into the real annual cost and the cost per productive hour, once employer contributions, overheads, holiday, sickness and training are counted: the figure job costing needs and salary divided by 2,080 is not.
Overview
Why calculate the true cost of an employee?
Enter a salary, the employer contributions that sit on top of it, the costs that are not salary at all, and the days that never get worked. This gives the real annual cost of the hire and, more usefully, the cost of an hour of work you actually get.
That second figure is the one job costing needs, and salary divided by 2,080 is not it. On a standard full-time pattern, holiday, public holidays, sickness and training remove something like 15% of the year before anyone has done anything wrong, so the hours you are paying for and the hours you can sell are two different numbers.
The reason the gap is larger than it feels is that the two adjustments compound. Contributions raise the cost; days off shrink the hours; and the raised cost is then spread over the smaller number of hours rather than the original one. A 30% on-cost with 15% of hours lost is not 45% more per hour, it is 53% more, and the gap widens as either figure grows.
No contribution rates are filled in. Employer payroll tax and minimum pension rates are set by jurisdiction and change with budgets, and a stale number here would end up inside a hiring decision. Look up the current ones and add them together.
Step by step
How to work out what an employee costs
Enter the salary and employer contributions
Type the annual gross salary, then look up the current employer payroll tax and pension rates for your jurisdiction and add them together as a percentage.
Add the costs that are not salary
Annual per-head costs like software, insurance and a desk, plus one-off costs such as recruitment and equipment, spread over how long you expect the person to stay.
Set the working pattern and the days off
Contracted hours, days a week and weeks a year, then the holiday, public holidays, sickness and training days that come out of them.
Read the cost per productive hour
That is the figure to use for job costing and for pricing. Add a billable share to see what an hour that actually reaches a client costs.
What you get
- Salary turned into total annual cost, with the multiple shown
- Cost per contracted, productive and billable hour
- Holiday, public holidays, sickness and training all removed from the hours
- One-off recruitment and equipment costs spread over the expected stay
- Shows why the two adjustments multiply rather than add
- No contribution rates baked in, because they change with every budget
Background
Why an hour costs so much more than the salary suggests
A salary is a headline, in the same way a list price is. It is the number in the advert, the number in the offer letter and the number everyone quotes, and it is not what the person costs. Sitting on top of it are employer payroll taxes, pension contributions, insurance, equipment, software licences, a share of the office, and the cost of finding them in the first place. Together those routinely add a quarter to a half again.
Underneath the salary is the other adjustment, and it works in the opposite direction. A contract might say 37.5 hours a week for 52 weeks, which is 1,950 hours. Take out five weeks of holiday, eight public holidays, a handful of sick days and a few days of training and around 1,650 remain. Nothing has gone wrong; that is simply what a normal year contains. But you are paying for 1,950 hours of availability and receiving 1,650 hours of work.
Put those together and the arithmetic stops being additive. If contributions and overheads raise the annual cost by a fraction c, and days off remove a fraction h of the hours, the cost of an hour is multiplied by (1 + c) ÷ (1 − h), not by 1 + c + h. At c = 30% and h = 15% that is 1.53 rather than 1.45: a difference of eight percentage points that comes from nowhere except doing the sum the intuitive way.
The mechanism is worth holding onto, because it is the same one that makes stacked discounts not add up. The loaded cost is spread over the smaller number of hours, not over the original number. Each adjustment applies to the result of the other, so they multiply. And because they multiply, the error grows: at 40% on-costs and 25% of hours lost, the intuitive answer is 1.65 and the real one is 1.87.
There is a third layer for anyone selling time rather than product. Productive hours are not billable hours. Admin, internal meetings, sales, and the gaps between jobs all come out of the same 1,650, and most teams bill somewhere between 60% and 80% of them. At 70%, an hour that actually reaches a client costs about 43% more again than a productive hour. That is why a rate that looks generous against a salary can still lose money.
None of this is an argument against hiring. It is an argument for knowing the number before pricing anything the person will work on, because every downstream figure (a quote, a project margin, a decision about whether a job was worth taking) depends on the cost of an hour, and using the salary in its place understates it by roughly half.
Not to be confused with
- Gross salary
- What the employment contract says and what the employee sees before their own deductions. The starting point, and about two thirds of the real story.
- On-costs
- Employer contributions that scale with salary: payroll tax and pension. Usually the largest addition, and the one most often left out of a rough estimate.
- Fully loaded cost
- Salary, on-costs, overheads and amortised one-off costs together. What the hire actually costs the business over a year.
- Contracted hours
- Hours a week times weeks a year. What the employment agreement obliges you to pay for, and never what you receive: the holiday is inside this number.
- Productive hours
- Contracted hours less holiday, public holidays, sickness and training. What the person is actually at work for.
- Billable hours
- The share of productive hours that reaches a client. Lower again, because admin, sales and internal work are real work that nobody pays for directly.
- Utilisation
- Billable hours as a share of productive ones. A team-level number, and the one that decides whether a viable rate produces a viable business.
Reference
What goes into the real cost
Costs on one side, hours on the other. The two most commonly omitted are the ones that move the answer most: the employer contributions, and the days that are paid but not worked.
The gross salary
The contracted annual figure. Everything else is expressed against it, which is why the multiple against salary is worth reading as well as the total.
Required
Employer contributions
Payroll tax and pension, as a percentage of salary. Set by jurisdiction and changed by budgets, so this is entered rather than assumed: a stale rate here lands inside a hiring decision.
Required
Annual costs per head
Software, insurance, phone, a desk or a share of the office. They do not scale with salary, which is why they matter proportionally more on a junior hire than a senior one.
Optional
One-off costs, spread
Recruitment fees, a laptop, onboarding time. Spread over how long you expect the person to stay, because charging them all to year one distorts both year one and everything after it.
Optional
The working pattern
Hours a week, days a week, weeks a year. Hours per day is derived from the first two rather than asked for, so the two cannot quietly disagree.
Required
Days not worked
Holiday, public holidays, sickness, training. Paid and not worked, which is exactly why they belong in the hourly figure: leaving sickness out makes the result optimistic by precisely what you eventually lose.
Required
The billable share
How much of the productive time reaches a client. Optional, and the difference between knowing what an employee costs and knowing what an hour you can sell costs.
Optional
Who it helps
Who needs an employee cost calculator?
Small businesses making a first hire
The point at which a salary budget turns out not to be a hire budget. Knowing the multiple before the offer goes out is cheaper than discovering it in month three.
Agencies and studios pricing team time
Every quote rests on the cost of an hour of someone's time. Using salary in its place understates it by roughly half and quietly prices work below cost.
Anyone deciding between a hire and a contractor
A contractor's day rate looks expensive against a salary and much less so against a fully loaded cost per productive hour. This produces the figure that makes the comparison honest.
Bookkeepers and accountants
Asked what a role really costs, usually with a budget already drafted. A per-hour figure is also what job costing and management accounts need.
Consultancies setting utilisation targets
The cost per billable hour is what a target rate has to clear. Working it backwards from cost is more reliable than picking a utilisation figure and hoping.
Anyone writing a budget for a funded project
Grant and tender budgets are usually costed per hour and audited against actuals. A defensible rate needs the working behind it, not a salary divided by a round number.
Do it properly
Best practices
Price against the productive hour, never the contracted one
You cannot sell the holiday. Costing against contracted hours understates every job by the share of the year nobody works, which on a standard pattern is several weeks.
Look up the current contribution rates
They move with budgets, and both the rate and the threshold matter. A figure carried over from last year is the most common reason a hire costs more than the plan said.
Allow for sickness before it happens
Some absence is certain across a year. Leaving it out does not make it go away; it makes the hourly figure optimistic by exactly the amount you eventually lose.
Spread recruitment over the expected stay
An agency fee is a cost of having the person, not of hiring them in one particular month. Amortising it stops year one looking like a disaster and year two like a windfall.
Recalculate when the salary changes
On-costs scale with salary and overheads do not, so a raise changes the multiple as well as the total. The per-hour figure moves by a different amount than the salary does.
Track the billable share separately
It is the number that decides whether the rate works, and it is the one most often assumed. Measuring it for a quarter is worth more than estimating it for a year.
Use the same figure everywhere
Quoting, job costing and hiring decisions should all rest on one cost per hour. Different numbers in different places is how a business stays profitable on paper and not in the bank.
Avoid these
Common mistakes
Dividing the salary by 2,080
Use the fully loaded cost over productive hours. The salary is roughly two thirds of the cost and 2,080 is around a quarter more hours than you get, so across ordinary patterns the real figure is between about 1.45 and 1.9 times the shortcut.
Adding the on-cost and the lost hours together
Multiply them: (1 + on-cost) ÷ (1 − hours lost). At 30% and 15% the sum says 1.45 and the truth is 1.53, and the error grows as either number does.
Leaving employer contributions out of a rough estimate
Put them in first. They scale with salary and are usually the single largest addition, so an estimate without them is not a rough figure but a wrong one.
Counting productive hours as billable hours
Apply a billable share. Admin, sales and internal work are real and unpaid by any client, and most teams sell between 60% and 80% of the hours they have.
Charging all the recruitment cost to the first year
Spread it over the expected tenure. Otherwise year one shows a loss that is not real and later years show a margin that is not either.
Comparing a contractor's day rate to a salary
Compare it to the fully loaded cost per productive day. A rate that looks like double the salary equivalent is often much closer once contributions, holiday and overheads are counted.
Assuming overheads scale with salary
Keep them separate. A laptop, a desk and a software seat cost the same for a junior as for a senior, which is why they weigh more heavily on a lower salary.
FAQ
Frequently asked questions
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