Are you about hiring employees for your business and you want to know the cost? If YES, here is a quick guide on how to calculate employee cost per hour.

Even though to some it may seem petty and trivial, calculating your employee cost per hour is very important for companies. If you do not know your employee cost per hour, it will be almost impossible to determine your true operating cost, and this is not good for any business.

Employee cost is also known as true employee cost, real employee cost, fully burdened employee cost, or fully loaded employee cost. Determining your employee cost per hour is not a walk in the park and can be quite challenging. The importance of knowing your employee cost per hour cannot be over emphasized.

If your business is service based, having a good grasp of your employee cost per hour is needed in order to fully understand your profitability. Knowing your employee cost will help you determine if the cost going into the production of a product is more or less than what you sell it for.

In addition to the wages you pay your workers, other employer costs include;

  • FICA taxes (social security and Medicare)
  • Insurance
  • Benefits such as retirement, gym, transportation, food, et al.
  • Equipment and supplies
  • Overhead such as office rent, utilities, et al.

It is quite obvious that these costs will vary from company to company and as such it is very important to understand your business in order to have a clear picture of your employee cost per hour. Here is how you can calculate your employee cost per hour.

A Quick Guide on How to Calculate Employee Cost Per Hour

1. Determine an Employees Wage and Hours Worked: the first step towards calculating your employee cost per hour will be to determine employees hourly wage, i.e. the number of hours they worked for you in a year and the number of days that they were not available due to vacation or sick leave.

For instance, if you pay a member of your staff $17 for every hour worked, and he worked for 2,080 hours (40 hours a week multiplied by 52 weeks). Let’s assume that the staff misses work for 20 days due to vacation and sick leave. Next, you will have to multiply the number of days that the employee could have missed work by eight hours per day.

Then subtract this result from the number of hours she is available for work per year to calculate the number of actual hours she works per year. In this example, multiply 20 by 8 to get 160 hours. Subtract 160 from 2,080 to get 1,920 actual hours of work per year.

2. Determine Directly Related Annual Costs: you will then have to determine from the information you already have the amount of annual costs you pay in addition to your employees hourly wages. Such costs could include payroll taxes, insurance, benefits, meals, supplies and training costs.

You will then have to add up these costs to find the labor burden cost of the employee. In line with the example from above, if you pay $1,000 in payroll taxes, $500 in insurance, $1,000 in benefits and $2,000 in supplies and other miscellaneous expenses, when you add them all together, you will get $4,500.

3. Determine Annual Payroll Labor Cost: next, you will have to multiply the hourly wage of the employee by how many hours he actually worked in a given year so as to determine his yearly payroll labor cost and then you should add the annual payroll labor cost to the employee cost.

Using our example, we will multiply $17 per hour by 2,080 hours to get a $35,360 annual payroll labor cost. Then we add $35,360 and $4,500 to get $39,860.

4. Calculate employee cost per hour: finally, you will then have to divide the result you got from number 4 by the number of hours worked in a year to get the employee cost per hour. Still using our running example, dividing $39,860 by 1,920 will give you an employee cost per hour of $20.76. This result will imply that the total cost to employ workers is actually $20.76 for every hour of work.

As a take away, you should not just jump to the conclusion that knowing your real cost should lead to cutting all cost without properly weighing its benefits. The data you gathered should be used to make good decisions about projects, meeting, productivity and how you and your staff spend your time and resources.

Ajaero Tony Martins