The cost of hiring an employee is more than the salary. Add employer taxes and contributions, benefits, equipment, advertising, your own time, training and a period when the new person is not yet at full speed. This guide gives a worksheet you can copy, a fictional worked example, and notes on how the pieces differ in the US, UK and EU.
Key takeaways
- Plan for the full cost, not only the salary or wage.
- Group costs into four layers: pay, legal on-costs, set-up costs and hiring and ramp-up costs.
- Use official calculators and rate pages for tax and contribution rates. They change, and they differ by country and region.
- Write the total as a yearly figure and a first-year figure. The first year is higher.
- Check your cash flow for the first 6 months before you post the job.
The four layers of hiring cost
Think of the cost as four layers. Each layer answers a different question, and you can estimate each one on its own.
| Layer | Question it answers | Examples |
|---|---|---|
| 1. Pay | What does the person receive? | Salary or hourly wage, bonus, commission, paid holiday |
| 2. Legal on-costs | What must I pay because I am the employer? | Employer taxes and social contributions, pension contributions, insurance, statutory leave and sick pay |
| 3. Set-up and running costs | What does the person need to do the job? | Laptop, phone, software licences, desk, training, uniform, travel |
| 4. Hiring and ramp-up costs | What does it cost to find and start the person? | Job board fees, agency fees, your time, interview time, onboarding, slower output in the first months |
Most first-time employers count only layer 1. Layers 2 to 4 often add a large share on top, and the share depends on the country, the role and how you hire. We do not give a single percentage here, because a reliable number needs a source for your country and year. Use the official pages in the next section.
Where to find the official figures
Rates for employer taxes, contributions and minimum pay change often. Do not copy a rate from an old blog post, including this one. Check the official page for your country on the day you plan the budget.
| Region | What to check | Official source |
|---|---|---|
| United States | Federal employment taxes, workers’ compensation and state rules. Wage and overtime rules. | SBA: hire and manage employees and US Department of Labor: wages and the FLSA |
| United Kingdom | Employer National Insurance, workplace pension duties, minimum wage, holiday and sick pay. | GOV.UK: employing people and National Minimum Wage and National Living Wage rates |
| European Union | Rules differ by country. Check your own national tax and social security authority. | Your Europe: hiring and managing staff |
Ask a payroll provider or an accountant for a quote on the exact on-costs for your first hire. Many offer a free estimate. This is general information, and your own advisor can apply it to your facts.
The cost worksheet
Copy this table into a spreadsheet. Fill in the “Amount” column with yearly figures in your own currency. Put one-off costs in the first-year column only.
| Line | Type | Yearly amount | First-year only |
|---|---|---|---|
| Base salary or wage | Pay | ||
| Bonus or commission (expected) | Pay | ||
| Paid holiday and public holidays | Pay (included in salary, but affects hours worked) | ||
| Employer taxes and social contributions | Legal on-cost | ||
| Pension or retirement contribution | Legal on-cost or benefit | ||
| Insurance (for example workers’ compensation, employer liability) | Legal on-cost | ||
| Health or other benefits | Benefit | ||
| Laptop and phone | Set-up | ||
| Software licences | Running | ||
| Desk, chair or remote work allowance | Set-up | ||
| Training and certificates | Running | ||
| Job ads and job board fees | Hiring | ||
| Agency fee (if used) | Hiring | ||
| Background or right-to-work checks (if charged) | Hiring | ||
| Your time and your team’s time | Hiring (see below) | ||
| Relocation or sign-on payment (if any) | Hiring | ||
| Reduced output in the first 2 to 3 months | Ramp-up (see below) |
How to price your own time
Your time is not free, even if no invoice arrives. Estimate the hours: writing the ad, reading applications, screening calls, interviews, notes, references, the offer, paperwork and onboarding. For a small team, 30 to 60 hours across the whole process is a reasonable range to plan for if you use a simple process, and it can be more without one. Multiply the hours by an hourly value for your time. A simple way to set the value is your own yearly pay or draw divided by the hours you work in a year. The result is an estimate, not an accounting entry, but it helps you compare options such as an agency fee against your own hours.
How to price the ramp-up period
A new person needs time to reach full output. Pick a number of months, then pick a percentage of output for each month. For a simple role you may use 50 percent in month one, 75 percent in month two and 100 percent from month three. For a complex role the period is longer. Treat the unproductive share of the salary as a hiring cost. These are planning assumptions, so write them down as assumptions and adjust them after your first hire.
A fictional worked example
This example is invented to show the arithmetic. The numbers are round and do not represent any real salary, tax rate or company. A small shop plans to hire one part-time customer support agent.
| Line | Assumption (fictional) | Amount per year |
|---|---|---|
| Base wage | 20 per hour, 20 hours per week, 52 weeks | 20,800 |
| Employer on-costs | Assume 15 percent of wage after checking the official page and asking the accountant | 3,120 |
| Benefits | Assume a fixed monthly allowance of 50 | 600 |
| Software licences | Help desk tool at 25 per month | 300 |
| Equipment (one-off) | Laptop and headset | 1,100 |
| Job ads (one-off) | Two job boards | 300 |
| Owner time (one-off) | 40 hours at 30 per hour | 1,200 |
| Ramp-up (one-off) | Equal to 40 percent of the first month’s wage | 347 |
Yearly running cost: 20,800 + 3,120 + 600 + 300 = 24,820. One-off costs in the first year: 1,100 + 300 + 1,200 + 347 = 2,947. First-year total: 27,767. The wage is 20,800, so the full first-year cost is about 33 percent higher than the wage alone in this example. In another country or role the gap will be different. The point is the method: list each line, mark what is yearly and what is one-off, and add them.
Three ways to lower the cost, and what each one risks
| Option | How it can lower cost | What to watch |
|---|---|---|
| Hire part-time or for fewer hours | Lower wage and lower variable on-costs | Check minimum hours rules and whether the role can be done in fewer hours |
| Use a simple process and do it yourself | Avoids agency fees | Costs your time. Use a fixed process so it stays short. See how to hire without HR |
| Hire a contractor or freelancer | No employer on-costs and no benefits | Misclassification can be expensive. Read the official rules, for example the IRS guide to contractor or employee in the US |
Do not lower cost by cutting corners that create risk: skipping contracts, paying below the minimum wage, ignoring holiday pay or paying in cash without records. These shortcuts often cost far more later in penalties, claims or a lost team member.
The cost of getting it wrong
A hire who does not work out adds cost: a second round of ads, more of your time and a second ramp-up. A clear role, a fair process and evidence-based screening lower that risk. Read our guide to what a bad hire really costs for a method to estimate it without invented statistics. Also see how to write a job ad that attracts the right applicants, because a clear ad lowers the number of unsuitable applications you must read.
A 30-minute budget routine
- Minutes 0 to 5: Write the role in one sentence and the hours per week.
- Minutes 5 to 10: Decide the pay range after checking local market data and the legal minimum.
- Minutes 10 to 15: Open the official page for your country and note the employer on-costs. If unsure, write “ask accountant”.
- Minutes 15 to 22: Fill in the worksheet, yearly and first-year columns.
- Minutes 22 to 27: Add the hiring costs: ads, your hours, any agency fee.
- Minutes 27 to 30: Compare the first-year total with your cash for 6 months. If you cannot cover it, change the hours or the timing.
Repeat the routine after you hire. Compare your estimate with the real figures. The gap tells you which lines to adjust for the next hire.
Common mistakes
- Using last year’s rates. Rates change. Check the official page each time.
- Forgetting the first-year costs. The first year is the most expensive year.
- Ignoring your own time. If your time is limited, it is the scarcest resource you have.
- Counting only the salary range from the ad. The person costs more than the number in the ad.
- Not planning for the end of the probation period or a pay review. Add a line for a likely raise in year two.
Questions to ask your accountant or payroll provider
A short call with a professional saves mistakes. Bring your worksheet and ask these questions. Write the answers next to the matching lines.
- What are the exact employer taxes and contributions for this role in my country and region, for this year?
- Which insurance must I hold before the first day of work?
- Is a pension or retirement contribution required, and from what start date?
- How are holiday pay, sick pay and public holidays handled in payroll?
- Which tax filings and registrations do I need before I pay the first wage?
- What is the cheapest legal way to run payroll for one person?
- Does the role qualify for any official hiring support or tax credit? Ask for the official source, and check it yourself.
When to revisit the numbers
Update the worksheet at four points: when you set the pay range, when you make the offer, at the end of the probation period and at the first pay review. At each point, replace assumptions with real figures. After the first year, keep a one-page record of the estimate against the real cost. This record is the most useful tool for your second hire, because you will know which lines you under-estimated.
If the full cost is above your budget, change one variable at a time: the hours per week, the start date, the scope of the role or the pay range. Do not change several at once, because then you cannot see which change helped. A role that is clear and focused also lowers cost, because it needs less training and less correction. See our guide to writing a one-page role brief before you finalise the budget.
Frequently asked questions
How much extra should I add on top of the salary?
There is no single number that is correct everywhere. It depends on the country, the region, the benefits and the type of contract. Use the official rate pages and ask an accountant or payroll provider for a quote for your case.
Is it cheaper to hire a freelancer?
Often the day rate is higher, but you may not pay employer on-costs or benefits. The rules on who counts as a contractor are strict, so read the official guidance before you decide.
Should I include my own time in the cost?
Yes, as an estimate. It does not change your bank balance, but it shows the true effort and helps you compare options.
What costs are easy to forget?
Equipment, software licences, training, insurance, holiday cover and the ramp-up period are the most common ones.
Do I need to tell candidates the pay in the job ad?
In some places the law now requires a pay range, or a range on request. Check the rules where you hire.
Related guides
- Hiring guides for small businesses and founders
- How to make your first hire: a step-by-step plan
- What a bad hire really costs, and how to lower the risk
- How to hire without an HR team
- All hiring guides for employers
- Employee or contractor? How to choose for your first role
- How to hire in another country: a first guide for small employers
- Pay transparency in hiring: EU, UK and US
- How to set a fair salary for a small business role
This is general information, not legal advice.