Does Hiring This Person Actually Pencil Out?

The gap between salary and real cost

When a business owner thinks about hiring someone at $60,000 a year, they think about a $60,000 expense. The real number is closer to $72,000–$84,000— and that’s before factoring in benefits, paid time off, or any overhead allocation.

The 1.2×–1.4× rule is a useful starting point: total fully loaded cost is typically 20%–40% above base wages. Where you land in that range depends on:

• Whether you offer health insurance (adds $4,000–$10,000/year for a single employee)
• Your industry’s workers comp rate (0.5% for office roles, 8%+ for trades)
• Your state’s SUTA wage base and rate
• Paid time off — every day of PTO is a day of wages paid for no work output
• 401(k) match, if offered

The tax costs are fixed and unavoidable. The benefit costs are choices — but choices that affect whether you can attract and retain the person you’re hiring.

Employer tax costs, line by line

Four mandatory employer taxes apply to every W-2 employee. None of them are optional, and none are withheld from the employee’s check — they’re an additional cost on top of wages.

FICA(Social Security + Medicare) is the biggest mandatory add-on — 7.65% of every dollar of wages. At a $75,000 salary, that’s $5,738 in additional cost before anything else. The employee also pays 7.65%, withheld from their paycheck — so the combined FICA rate is 15.3%, split equally.

FUTAis capped at $42 per employee per year (0.6% × $7,000). It’s small but real — and requires a separate annual Form 940.

SUTAvaries more than any other employer tax. California’s new-employer UI rate is 3.4% on the first $7,000 ($238/year per employee). But your rate adjusts after 2–3 years based on your unemployment claim experience. High-turnover businesses with frequent layoffs end up with significantly higher rates. Some states also have much higher wage bases — Washington’s is over $72,000.

Workers compis technically insurance, not a tax — but it’s a mandatory cost in every state with employees. Rates vary by classification code and by your claim history. Office roles run 0.3%–0.8%; restaurants and fitness run 2%–3%; construction trades can exceed 8%–15%.

At 10 employees earning $50,000 each, employer FICA alone adds $38,250 per year — before a single dollar of benefits, workers comp, or unemployment tax.

The revenue-per-employee math

Knowing what a hire costs is step one. Step two is asking whether the business can support that cost — which depends on your gross margin.

The break-even formula:

Break-even revenue = total loaded cost ÷ gross margin %

This answers: how much revenue does this employee need to generate (or enable) before the hire pays for itself?

For revenue-generating roles(stylist, personal trainer, server), the math is straightforward: compare the employee’s expected direct revenue contribution to their loaded cost. If a stylist generates $95,000 in service revenue and costs $68,000 loaded, the hire contributes $27,000 to profit.

For support roles(admin, floor manager), there’s no direct revenue contribution — the logic is either efficiency gains (this person enables $X more in revenue from existing staff) or operational necessity (this role is required to run the business at current scale). Both are valid reasons to hire; just model them explicitly.

When a hire makes sense vs. when it doesn’t

A hire makes financial sense when the expected contribution exceeds the loaded cost. That sounds obvious — but most owners do this math informally, if at all.

Signs a hire makes sense:

• The role is directly revenue-generating and expected output exceeds loaded cost by a meaningful margin
• Current staff are operating at capacity and you’re turning away work or losing customers
• The hire enables revenue growth that can’t happen at current headcount
• The role eliminates an owner bottleneck worth more than the hire cost

Signs a hire may not pencil out yet:

• Revenue is inconsistent and you can’t sustain the annualized payroll
• The break-even revenue target is significantly above current or projected revenue for that role
• The role is a “nice to have” at current scale — something that might free up 5 hours/week but doesn’t drive revenue
• You’re hiring to reduce your own workload before the business has the margin to support it

Neither list is absolute. Businesses hire ahead of revenue all the time — sometimes that’s the right move. The point is to make the decision with the actual numbers in front of you, not on intuition.

W-2 vs. 1099: the classification question

From a pure cost standpoint, 1099 contractors look cheaper: no employer FICA, no workers comp, no benefits required, no unemployment taxes. A contractor paid $60,000 costs exactly $60,000. The same person as a W-2 employee might cost $72,000.

The problem is that worker classification is a legal determination — not a business preference. You can’t make someone a 1099 contractor just because it’s cheaper.

California’s ABC test (AB 5 and successor legislation) is stricter than the federal standard. To classify someone as an independent contractor in California, the hiring business must establish all three:

• A: The person is free from control and direction of the hiring entity
• B: The person performs work that is outside the usual course of the hiring entity’s business
• C: The person is customarily engaged in an independently established trade or business

A salon hiring a stylist who works set hours at your location, uses your booking system, and serves only your clients almost certainly fails the ABC test. Misclassification in California can result in back payroll taxes, the employer share of FICA going back 3–6 years, penalties, and interest.

California-specific considerations

California has several employer obligations beyond the federal baseline that affect total cost and compliance burden:

• SUI (State Unemployment Insurance): Filed through EDD, new employer rate 3.4% on the first $7,000. Your rate adjusts based on claim experience after the first 2–3 years. High-turnover businesses end up with higher rates.
• SDI (State Disability Insurance): Starting in 2024, the employer-side SDI tax was eliminated for most employers. However, the employeewithholding is now uncapped (previously there was a taxable wage ceiling). This doesn’t add to your employer cost directly, but affects employee take-home pay and your withholding calculations.
• Paid sick leave: California requires at least 5 days (40 hours) of paid sick leave per year. Local ordinances in some cities (San Francisco, Los Angeles, others) require more. This is a minimum floor — any additional PTO you offer is on top of this.
• Pay transparency (SB 1162): California employers with 15 or more employees must include pay scale ranges in all job postings. Employers with 100 or more employees must submit annual pay data reports to the Civil Rights Department. Violations carry civil penalties.
• Workers comp: California workers comp rates vary by classification code and by carrier. Construction, restaurant, and fitness businesses typically pay more than office businesses. Your experience modification factor adjusts the rate up or down based on your claim history.

The trust fund penalty reminder

When you run payroll, two things happen simultaneously: you pay employees their net wages, and you withhold federal income tax plus the employee share of FICA from their gross pay. Those withheld amounts don’t belong to the business — they are held in trust for the IRS until you deposit them.

When cash is tight, some employers use payroll tax deposits to cover other operating expenses — essentially borrowing from the IRS. This is one of the most dangerous mistakes in small business finance.

If payroll is straining your cash flow, talk to a CPA before payroll day — not after. Options exist: payment plans, addressing the underlying cash flow problem, or adjusting payroll structure. None of them are “skip the deposit.”

For a full breakdown of deposit schedules, Form 941, and the failure-to-deposit penalty tiers, see the Payroll Taxes for Employers guide.

Model your specific hire

The math above uses illustrative numbers. Your actual loaded cost depends on your wage, state, industry, and benefit decisions. The Employee Cost Calculator lets you enter those specifics and see the fully loaded annual cost and break-even revenue for the hire you’re actually evaluating.