When a founder says "I can't afford to hire," they often mean they're comparing the salary to their cash position. But the actual cost of an employee is 25–40% higher than the salary. This guide breaks down exactly where that extra cost comes from.
The components of total employer cost
1. Base salary — the number in the offer letter
2. Payroll taxes (mandatory): - FICA Social Security: 6.2% of wages (up to wage base) - FICA Medicare: 1.45% of all wages - FUTA: effectively ~$42/employee/year after state credit - SUTA: 0.5–5%+ of wages up to state wage base
3. Benefits (expected for full-time): - Health insurance: $500–$2,000/month employer contribution - 401(k) match: typically 3–5% of salary - Dental + vision: $50–$150/month - Paid time off: implicit cost of unworked time (15–25 days/year)
4. Overhead (not always calculated explicitly): - Equipment: $1,500–$5,000 for laptop + accessories - Software licenses: $50–$500/month per employee - Office space: $500–$3,000/month per seat (if applicable) - Recruiting cost: typically 15–25% of first-year salary (one-time)
The 1.25–1.40× rule for most US employees
Most employers use 1.25–1.40× as the overhead multiplier for budgeting purposes.
| Salary | 1.25× | 1.35× |
|---|---|---|
| $80,000 | $100,000 | $108,000 |
| $120,000 | $150,000 | $162,000 |
| $160,000 | $200,000 | $216,000 |
The 1.35–1.40× range is more realistic for roles with comprehensive benefits packages.
Contractor vs employee cost
1099 contractors don't trigger payroll taxes or benefits obligations. But contractors typically charge 40–60% more per hour to compensate.
Rule of thumb: if you need someone for less than 18 months, a contractor may be cheaper. If longer, a full-time employee with employer cost efficiency usually wins.
Use the Payroll Cost Calculator to calculate the exact total cost for any salary and benefits scenario.