Your First Employee Costs More Than You Think
You've decided to hire. You've budgeted $60,000 for the salary. What you haven't budgeted for is the other $15,000–$24,000 that comes with it.
The gap between salary and true cost surprises every first-time employer. Here's exactly where the extra money goes.
Payroll taxes are mandatory. As an employer, you pay 7.65% of the employee's salary in FICA taxes (6.2% Social Security + 1.45% Medicare). On a $60,000 salary, that's $4,590. You also pay federal unemployment tax (FUTA), about $42 per employee per year. And state unemployment tax (SUTA), which ranges from 0.5% to 5%+ depending on your state and claims history. In California, a new employer pays about 3.4%, or $2,040 on a $60K salary. In Texas, it's closer to 2.7%, or $1,620.
| Tax | Rate | Cost on $60K |
|---|---|---|
| Social Security (employer share) | 6.2% | $3,720 |
| Medicare (employer share) | 1.45% | $870 |
| FUTA | Flat | $42 |
| SUTA (varies by state) | 0.5%–5%+ | $300–$3,000+ |
| Total payroll taxes | $4,932–$7,632 |
Health insurance is the second biggest cost. You're not legally required to offer it if you have fewer than 50 full-time employees, but offering it helps attract better talent. The average employer contribution for single coverage is about $8,400/year. Family coverage averages $16,000+/year for the employer portion.
Retirement match adds another layer. If you offer a 4% 401(k) match on a $60,000 salary, that's $2,400/year. It's optional, but competitive hiring often demands it.
Workers' compensation insurance is required in almost every state. Rates vary by industry and state. office workers might cost $0.50 per $100 of payroll, while construction workers cost $5–$15 per $100. For an office employee at $60K, that's about $300/year.
Let's add it all up for a $60,000 employee in California with health insurance and a 4% retirement match:
| Component | Annual Cost |
|---|---|
| Base salary | $60,000 |
| FICA (employer share) | $4,590 |
| FUTA | $42 |
| SUTA (CA, 3.4%) | $2,040 |
| Health insurance | $8,400 |
| 401(k) match (4%) | $2,400 |
| Workers' comp | $300 |
| True annual cost | $77,772 |
| True monthly cost | $6,481 |
That's 29.6% more than the salary. The employee sees $60,000. Your business pays $77,772.
State matters. The same employee costs less in Texas (lower SUTA) and more in New York (higher SUTA, additional state payroll taxes). The difference can be $2,000–$5,000/year for the same role at the same salary.
The question isn't just "can I afford the salary?". It's "can I afford the true cost?" If your monthly revenue is $15,000 and the true cost of your first hire is $6,481/month, that employee consumes 43% of revenue. Add your other operating expenses and there may be nothing left. Most healthy small businesses keep total payroll costs under 30% of gross revenue.
Before you post the job listing, run the numbers. Use the Employee Cost Calculator to enter the salary, state, and benefits package. The Single Hire tab shows the true annual and monthly cost. The How Many tab tells you how many employees your revenue can actually support.
Frequently Asked Questions
How much does an employee really cost beyond salary?
Typically 25–40% more than the base salary. A $60,000 employee costs $75,000–$84,000 once you add payroll taxes, health insurance, retirement contributions, and workers' comp. The exact number depends on your state and benefits package.
What payroll taxes do employers pay?
7.65% of salary for FICA (Social Security + Medicare), about $42/year for FUTA, and state unemployment tax (SUTA) which varies from 0.5% to 5%+ by state. These are in addition to the employee's own tax withholdings.
When should a small business hire its first employee?
When the cost of not hiring exceeds the cost of hiring. If you're turning down work, delivering late, or burning out doing everything yourself, it's time. But only if your revenue can cover the true cost. salary plus 25–40%, and still leave margin for other expenses.
Can I hire a contractor instead to save money?
Contractors cost less in taxes and benefits (no FICA employer share, no insurance, no workers' comp). But you can't control their schedule, methods, or tools. The IRS has strict rules about who qualifies as a contractor vs. employee. Misclassification penalties are severe.