A salary is the number on the offer letter, but it is not what the job costs. Before the first paycheck goes out, the business owes its own share of Social Security and Medicare, federal unemployment tax, state unemployment tax and, in most jobs, a pile of benefits. Paid holidays and vacation mean some of those paid hours are never worked. And every employee needs a laptop, software, a desk and someone to run payroll.
This guide walks through each layer for 2026, with the rates from the IRS and the U.S. Department of Labor, and shows how they add up for real salaries. The employee cost calculator does all of it for your own numbers.
The short version
Take a $60,000 employee in Texas with a $500 monthly share of health insurance, a 3% 401(k) match and 15 paid days off. Their total cost to the business is $72,675 a year, which is 1.21 times their salary.
| Line | Annual |
|---|---|
| Gross pay | $60,000 |
| Pay for hours worked | $56,538 |
| Paid time off | $3,462 |
| Employer Social Security | $3,720 |
| Employer Medicare | $870 |
| Federal unemployment (FUTA) | $42 |
| Texas unemployment tax | $243 |
| Health insurance (employer share) | $6,000 |
| 401(k) contribution | $1,800 |
| Total cost to employer | $72,675 |
Payroll taxes are a fixed, predictable slice. Benefits are usually the bigger slice, and they vary enormously from one employer to the next. Overhead is the slice most often forgotten.
Employer Social Security and Medicare
The largest payroll tax is the one employers share with employees. For 2026, the employer pays Social Security at 6.2% of each employee’s pay up to $184,500, and Medicare at 1.45% of all pay, with no cap. These are the same rates withheld from the employee’s paycheck, so the employer is matching them dollar for dollar.IRS
There is one exception to the match. Employees who earn more than $200,000 in a year have an extra 0.9% Additional Medicare Tax withheld on the excess, but there is no employer share of it. IRS Publication 15 says so directly: “Additional Medicare Tax is only imposed on the employee.”
On a $60,000 salary, the employer’s Social Security and Medicare come to $3,720 and $870. For a $250,000 executive, Social Security stops once pay reaches the wage base, so the employer pays $11,439, while Medicare keeps going all year to $3,625.
Federal unemployment tax (FUTA)
FUTA funds the federal side of unemployment insurance, and only the employer pays it. For 2026 the tax is 6.0% of the first $7,000 paid to each employee, but employers that pay their state unemployment tax in full and on time get a credit of up to 5.4%, leaving 0.6%.IRS In most states, that works out to $42 per employee per year, no matter how much they earn.
The exception is a credit reduction state: one that has borrowed from the federal unemployment trust fund and not repaid it for two years running. Employers there lose part of the 5.4% credit. For 2026, the Department of Labor lists California as a potential credit reduction state, with a 1.5% reduction for its outstanding loan and an estimate of up to 5.3% if add-on reductions apply. The final figure is announced on November 10.U.S. DOL At the potential 1.5% (California’s final reduction for 2025 was 1.2%; the 2026 rate is set in November), a California employee’s FUTA rises to $147 for the year, and at DOL’s maximum estimate it would be $413. The extra is paid with the fourth-quarter deposit.
The FUTA tax calculator works through Form 940 line by line for a whole payroll.
State unemployment tax
Every state runs its own unemployment insurance program, funded mainly by a tax on employers. It is often called SUI or SUTA. Two numbers matter:
- The taxable wage base: how much of each employee’s pay is taxed each year. It ranges from the federal minimum of $7,000 in states such as California, Florida and Tennessee to more than $70,000 in Washington.
- The rate: each employer gets its own. New employers start on a new-employer rate set by the state. After a few years, the rate is based on how many former employees claimed benefits against the account, and arrives each year on a rate notice.
The U.S. Department of Labor publishes every state’s wage base, rate range and new-employer rate twice a year.U.S. DOL For the largest states we also checked the state agency’s own 2026 figures, because several add surcharges on top of the base rate. New York, for example, adds a 0.075% Re-employment Services Fund charge to its 4.025% new-employer rate,NY DOL and Illinois’ 3.35% entry rate includes a 0.55% fund-building rate.IDES
Because both the base and the rate vary, a new employer’s state tax on a $60,000 employee differs a lot by state:
- Texas: $243
- Florida: $189
- California: $245
- New York: $722
- New Jersey: $1,254
- Pennsylvania: $382
A few states, including Washington and Minnesota, assign new employers their industry’s average rate rather than one statewide figure, so you need your own rate notice. Alaska, New Jersey and Pennsylvania also take a small unemployment contribution out of employees’ pay; that comes from the employee, not the business.
Like FUTA, state unemployment tax stops at the wage base, so most of it is paid early in the year. The employer payroll tax calculator shows it paycheck by paycheck.
Benefits: usually the biggest add-on
Health insurance is where employer costs diverge the most, so use what your plan actually charges the business per employee per month, not a national average. Retirement plans add a match or a flat contribution, usually stated as a percentage of pay.
Two tax points work in the employer’s favor. Employer-paid health insurance premiums and employer contributions to a qualified retirement plan such as a 401(k) are not wages for Social Security, Medicare or FUTA, so no payroll tax is added on top of them.IRS A dollar of benefits costs the business a dollar; a dollar of extra salary costs a dollar plus payroll tax.
In the Texas example above, benefits add $7,800 a year, more than the employer’s payroll taxes of $4,875.
Some employer costs are easy to miss: workers’ compensation insurance (priced by your insurer and your industry), state disability or paid family leave contributions in the states that require employers to pay part, life and disability insurance, and stipends. Add them under other benefits in the calculator.
Paid time off and the cost per hour worked
Vacation, holidays and paid sick days don’t change the yearly total, since they are already part of the salary. They do change what each working hour costs, because the same pay buys fewer hours of work.
The same $60,000 Texas employee with 15 paid days off costs $37.08 per hour actually worked. With 25 paid days off, the cost per hour worked rises to $38.66, even though the yearly total is unchanged.
That per-hour figure is the one to use when you compare an employee with a contractor, or when you set the price you charge clients for someone’s time.
Overhead and the fully loaded cost
Every employee also uses things that don’t show up on payroll: a computer and software licenses, office or desk space, equipment, training, and a share of HR, accounting and management time. Finance teams call the total including all of this the fully loaded cost.
There is no universal overhead percentage. Work it out from your own books: divide yearly overhead by the number of employees, or by payroll to get a percentage. With 15% overhead added, the Texas example becomes $81,675 a year, or 1.36 times salary.
If the employee’s time is billed to clients, the billable rate calculator turns the loaded cost into the hourly rate you need for a target profit margin, after accounting for the hours that can’t be billed.
Three employees, three totals
Federal and state unemployment taxes stop at their wage bases, so they weigh more on lower salaries; Social Security stops at its wage base, so the share drops again for high earners. The state sets the rest:
A $40,000 employee in Florida, no benefits: employer payroll taxes of $3,291, or 8.228% of pay.
A $60,000 employee in California, no benefits: $4,982, or 8.303% of pay. California’s FUTA credit reduction and its new-employer rate plus Employment Training Tax push this above most states.
A $150,000 employee in New York, no benefits: $12,239, or 8.159% of pay.
| Line | First paycheck | Last paycheck | Year |
|---|---|---|---|
| Gross pay | $5,769 | $5,769 | $150,000 |
| Social Security (6.2% employer share) | $358 | $358 | $9,300 |
| Medicare (1.45% employer share) | $84 | $84 | $2,175 |
| Federal unemployment (FUTA) | $35 | $0 | $42 |
| New York unemployment tax | $237 | $0 | $722 |
| Total employer taxes | $713 | $441 | $12,239 |
Add benefits, paid time off and overhead and the gap between salary and cost grows well beyond these payroll tax figures.
Employee or contractor?
A contractor paid on a Form 1099 costs only what you pay them: no employer Social Security and Medicare, no unemployment tax, no benefits. That is why contractors charge more per hour. They pay self-employment tax on their profit, which covers both halves of Social Security and Medicare: 12.4% and 2.9% on 92.35% of net profit, with the Social Security part capped at the wage base.IRS
For a $75,000 salary in Texas with typical benefits, a contractor would need to bill less than $46.50 an hour over a 48-week year to cost the business less, and would need about $47.01 an hour to keep as much as the employee does before income tax. The contractor vs employee calculator runs both sides.
The choice is not purely financial. Whether a worker is an employee depends on the degree of control and independence in the relationship: who controls how the work is done, who controls the business side of it, and how the parties treat the relationship. A business that treats an employee as a contractor without a reasonable basis can be held liable for the employment taxes.IRS
A checklist before you make an offer
- Salary or hourly pay for the year, including expected overtime (time and a half over 40 hours a week for nonexempt staff; the overtime cost calculator prices it).
- Employer Social Security and Medicare on all of it, up to the wage base for Social Security.
- FUTA: usually a small fixed amount per employee, more in a credit reduction state.
- State unemployment tax at your rate and your state’s wage base.
- Other state employer taxes, such as disability, paid leave or training funds, where your state has them.
- Health insurance: your actual employer share per month.
- Retirement match or contribution.
- Workers’ compensation and other insurance.
- Paid time off, to get the cost per hour actually worked.
- Overhead: equipment, software, space, training, admin.
Frequently asked questions
How much does an employee cost compared with their salary? It depends mostly on benefits. Payroll taxes alone are a fairly steady percentage for most salaries; health insurance, retirement contributions and overhead can add far more. Enter your actual benefit costs in the employee cost calculator to see your multiplier.
Do employers pay taxes on employee benefits? Not on employer-paid health insurance premiums or employer contributions to a qualified retirement plan; those are exempt from Social Security, Medicare and FUTA. Some other fringe benefits are taxable wages, so check IRS Publication 15-B for the ones you offer.
Why does a new business pay a higher state unemployment rate? New employers have no history of claims, so states assign a standard new-employer rate. After a few years the rate is based on your own record: how many former employees have claimed benefits against your account compared with your taxable payroll.
Is the employer’s payroll tax taken out of the employee’s paycheck? No. The employer’s share is a business expense. The employee’s own Social Security and Medicare are withheld separately; the paycheck calculator shows the employee’s side.