Calculating the Total Cost of Employees: A Comprehensive Guide for Informed Financial Decision-Making

Determining the total cost of employees is a crucial aspect of making well-informed financial decisions, regardless of your company’s size or industry. Having a clear understanding of all costs associated with employees helps your finance and HR departments in creating precise budgets for each location your company operates in. 

In this blog, we shall understand how this cost is calculated, factors considered, various determinants, and much more.

What is the Total Cost of Employees?

The total cost of employees refers to the overall expenditure a company incurs for its workforce. It encompasses various elements, including employee salaries, payroll taxes, and additional benefits, among others.

In addition to paying employees their salaries and withholding taxes to remit to the government, employers generally have further financial obligations to the government when they hire an employee. 

So, if an individual’s gross salary is, for instance, $60,000 per annum, it encompasses the entire package of salary, taxes, and related deductions for that individual. 

However, the true cost to the employer will not be limited to $50,000. It will be higher than $50,000 because the employer will also be obligated to make additional contributions to the government as the employer of the person. 

Also, it is important to note that the employer contribution amounts vary from country to country.

How Total Cost of an Employee is calculated after hiring?

Companies determine employee costs by aggregating all relevant expenses linked to an employee over a year and subsequently dividing by the number of hours the employee works on an annual basis. 

These expenses encompass the gross salary, payroll taxes, and supplementary costs, such as benefits (health insurance, retirement plans, etc.), training, equipment, and workspace expenses.

Employers must also consider the overhead costs related to their facilities and any software or tools the employee needs. The costs may also vary based on statutory requirements such as employer contributions to social security, unemployment taxes, or workers’ compensation insurance. 

All of these elements combined give a comprehensive view of the true economic cost of an employee to the organization.

Here is a general procedure for computing the annual mandatory costs associated with employees in addition to their base pay:

1. Define the Employee’s Gross Annual Income

Start by obtaining the employee’s gross yearly earnings before any tax deductions. As an example, consider an employee in Quebec, Canada, with a gross annual salary of $C60,000.

2. Payroll Taxes Calculations

Subsequently, calculate the comprehensive annual payroll taxes that you are obligated to remit on behalf of your employee. 

In Quebec, this encompasses several federal requisites along with two provincial obligations exclusively applicable to employees in Quebec: labor standards and parental leave contributions.

3. Include Supplementary Expenditures

Compute the cumulative cost of any supplementary annual outlays linked to the employee, which might encompass additional benefits, onboarding expenses, and work-related equipment. 

Some of these expenses, like office rent and company-sponsored events, are shared among multiple employees. 

To determine the total shared expense per employee, tally the shared expenses and divide the sum by the total number of employees. Add this figure to the other supplementary employee costs.

“There is No One-size-fits-all Formula for Determining Employee Costs’

The overall expenditure associated with an employee encompasses not only their base salary or wage but also various other costs incurred by the business during the hiring process. 

There is no one-size-fits-all formula for determining employee costs. To compute the total cost per employee, you can multiply their base salary by either 1.25 or 1.4. This calculation provides the minimum and maximum cost boundaries for each employee.

For instance, if you bring on board a new employee with an annual salary of $52,000, the actual cost would fall between $65,000 and $72,800. Similarly, an employee earning an hourly rate of $20 results in an hourly cost ranging from $25 to $28, as per this formula.

This formula furnishes employers with an initial approximation of the actual employee costs, aiding in the estimation of project expenses and the evaluation of business profitability.

Variables Affecting The Employee Cost

Here are the factors that impact the total cost of employees –

1. Location

The geographical choice for your business significantly influences employee compensation. Each region has distinct state and local employment taxes, cost of living, and market demands, all impacting the overall cost of employees.

2. Industry

The sector of operation also plays a crucial role in determining the cost per employee, as different industries adhere to distinct employment norms. 

For instance, some industries mandate comprehensive health insurance coverage, increasing the overall employee expenditure. Conversely, certain industries provide only partial health benefits as standard practice.

3. Company Size

The size of a company can lead to variations in employee costs. Larger corporations may, at times, enjoy more favorable employee cost structures and can offer higher compensation to their workforce. 

Conversely, small businesses may struggle to provide competitive rates, occasionally resulting in elevated turnover rates and increased hiring expenses.

4. Market Conditions

Market dynamics, shaped by the laws of supply and demand, significantly impact employee costs. In order to attract top talents possessing rare skill sets, companies often enhance their benefits packages, leading to higher employee expenditures. 

However, a surplus of available human resources in a specific role ensures that compensation remains at or above the state-mandated minimum wage.

5. Turnover Rates

Companies characterized by high turnover rates incur considerably more employee costs than their counterparts due to the expenses associated with recruitment and onboarding. 

Recruitment costs cover fees for job postings, recruitment software, background checks, and human resources. Onboarding new hires also involves additional expenses, including training.

6. Roles and Tasks

Individuals with unique skill sets, educational qualifications, and a wealth of experience that attests to their expertise can demand higher salaries. Most organizations offer competitive remuneration packages to recruit and retain such individuals, thereby escalating labor costs.

7. Unions

Workers who belong to a labor union may incur higher expenses for employers in comparison to their non-unionized counterparts. 

Employers are bound by the minimum wage threshold determined by the labor union, typically exceeding the minimum wage applicable to non-unionized workers.

Furthermore, unionized wages can influence employers who do not hire union-affiliated staff. In cases where employers operate within an industry with labor unions, they might find themselves compelled to provide elevated wage packages to remain competitive in attracting top-tier talent.

8. Performance

Employee performance constitutes a critical factor in determining overall employee costs. High-performing and efficient employees can lower costs by effectively managing their assigned tasks. 

This efficiency reduces the time and resources required for job completion, subsequently reducing the total cost.

Many employers employ performance evaluations to differentiate between high-performing and low-performing staff and as a basis for determining salary levels.

Tracking employee performance is made easier with time-tracking tools like TimeCamp. These tools provide productivity data, offering valuable insights into workforce efficiency and its impact on business costs.

Factors to Consider When Determining the Total Cost of Employees

Following are some of the critical things to consider while calculating the total cost of employees.

1. Recruitment Expenses

Throughout the hiring process, companies incur significant outlays, encompassing job posting fees, expenses related to applicant tracking software (ATS) subscriptions, and the HR team’s dedicated time and resources in filling each vacancy. 

Outsourcing recruiting to external partners typically involves a commission or retainer, equivalent to 15% to 30% of the filled position’s base salary.

2. Onboarding Expenditures

Onboarding typically extends over 90 days, and it might take a year for an employee to reach peak performance. This process incurs various costs. First, there are administrative expenses related to paperwork handled by HR. 

Additionally, there are costs associated with setting up workspaces, which may involve providing up to $2,000 for remote employees’ home offices. 

Also, onboarding encompasses travel and relocation expenses as well as expenses tied to employee training and supervision. Effective onboarding, when executed correctly, significantly enhances retention rates and reduces long-term employee costs.

3. Compensation

An employee’s base salary or wage represents the most substantial cost to a company and is readily measurable. Salary or wage is influenced by factors like the role, experience, and market demand for skills. 

Compliance with minimum wage laws in the respective country or state is mandatory, ensuring fairness and competitiveness in global compensation strategies.

4. Statutory Benefits

Statutory benefits differ between regions and can constitute a substantial portion of total employee costs. 

For example, Mexican law mandates a 15-day salary holiday bonus, while Spanish law requires two annual bonuses, each equivalent to one month’s salary. Additional statutory benefits may include medical insurance, worker’s compensation, and pension funds.

5. Supplemental Benefits

Supplemental benefits are non-mandatory perks that employers offer beyond statutory requirements. These benefits vary by location and are often at the employer’s discretion, including health insurance, dental and vision coverage, retirement plans, and parental leave.

6. Taxation

Tax rates vary across countries and states. Employers contribute to several federal or state funds for each employee, covering areas like unemployment insurance, workers’ compensation, and medical insurance.

7. Overhead Expenses

Overhead costs, essential for daily business operations, comprise items like office space rental, utilities, office supplies, and company uniforms. Costs depend on factors such as the team’s size and business type.

8. Hidden Outlays

Often overlooked are expenses related to meetings, ongoing training, seminars, and company retreats. These hidden costs are influenced by team size, with larger teams requiring more time for meetings and incurring higher retreat expenses.

Overwhelmed? Tarmack’s Employee Cost Calculator Has Got You Covered.

Using Tarmack’s Employee Cost Calculator can be greatly beneficial for an employer as it simplifies the process of calculating costs with respect to different countries. 

You simply need to input the gross salary of the employee, and the tool quickly calculates the mandatory statutory contributions, such as social security, taxes, and any other country-specific labor costs. This is not only a time saver, but it also provides accurate and comprehensive financial information that helps with strategic budgeting and compensation planning. 

With this tool, you can also ensure that you are compliant with local labor laws and are prepared for the financial commitment of expanding their workforce internationally.