How to Calculate Hourly Cost of an Employee

For the sake of occasional business analysis — such as calculating return on investment (ROI) on a project, hiring a new employee, allocating costs — here’s a simple formula for calculating the hourly cost of an employee:

cost per hour = annual gross salary/1000

So the $75,000/year salary costs the company $75 per hour. The $30,000/year data entry person costs the company $30 per hour.

This quick and practical calculation is based on the assumption that the overhead, including payroll taxes, health insurance, benefits, office space, office equipment, telephone, Internet, electric power, transportation, and so forth costs the company about as much as the employee gross salary.

So the step-by-step calculation, using a $75,000 salary, is:

1. Double the gross salary ($150,000)
2. Divide by 50 because a work year includes 50 weeks ($150,000/50 = $3,000)
3. Divide by 40 because a work week includes 40 hours ($3,000/40 = $75)