Employee Cost Per Hour Calculator
Reveals the true hourly cost of an employee by adding salary, benefits, taxes, and overhead then dividing by productive hours. Essential for accurate project pricing and profitability analysis.
About this calculator
The sticker price of an employee — their annual salary — understates their real cost to the business. Benefits such as health insurance and retirement contributions, employer-side payroll taxes, and shared overhead like office space and equipment all add to the total. The formula is: costPerHour = (annualSalary + benefitsCost + payrollTaxes + overheadCost) / billableHours. Billable or productive hours represent only the portion of working time that generates revenue or output — typically 1,400–1,800 hours per year after accounting for vacation, holidays, training, and administrative tasks. Dividing total cost by this smaller denominator reveals why the true hourly cost is often 1.5–2× the apparent salary-based rate. This figure is critical for setting service prices, evaluating outsourcing decisions, and building accurate project budgets.
How to use
An employee earns $60,000 annually. Benefits cost $12,000, payroll taxes $8,000, and overhead allocation $5,000. Total annual cost: $60,000 + $12,000 + $8,000 + $5,000 = $85,000. The employee logs 1,600 billable hours per year. Cost per hour: $85,000 / 1,600 = $53.13/hr. Although the salary implies a $28.85/hr rate ($60,000 / 2,080 hours), the true cost is $53.13 — 84% higher. Use this figure when quoting client projects or comparing in-house versus outsourced labor.
Frequently asked questions
What costs should be included when calculating the true cost of an employee per hour?
Beyond gross salary, you should include employer-paid benefits (health, dental, vision, retirement matching, life insurance), employer payroll taxes (FICA, FUTA, SUTA), workers' compensation insurance, and a proportional share of overhead such as office rent, utilities, software licenses, and equipment depreciation. Recruiting and onboarding amortization can also be included for a fully loaded rate. Missing any of these categories causes you to underprice services or underestimate project costs.
How many billable hours per year should I use for an employee cost calculation?
A standard work year contains 2,080 hours (52 weeks × 40 hours), but not all of those are productive or billable. Subtract paid vacation (typically 80–120 hours), public holidays (~80 hours), sick leave (~40 hours), and non-billable time like internal meetings and training (100–200 hours). A realistic billable hour figure for most knowledge workers falls between 1,400 and 1,700 hours annually. Using the full 2,080 hours understates true cost per hour and can make projects unprofitable.
Why is employee cost per hour important for project pricing and outsourcing decisions?
Knowing the true hourly cost allows you to set service prices above break-even and ensures that fixed-fee projects are profitable. It also creates an apples-to-apples comparison when evaluating contractors or offshore vendors, who quote all-in hourly rates that appear high but often exclude the overhead embedded in an employee's true cost. Many companies discover that a $50/hr contractor is cheaper than an in-house employee whose true cost exceeds $60/hr. This insight drives more informed build-vs-buy and staffing decisions.