Your $25-an-Hour Employee Doesn’t Cost $25 an Hour

Your employee earns $25 an hour. You charge $75. That leaves $50 for the business, right?

Only if payroll taxes, insurance, holidays, tools and Tuesday’s cancelled appointment all cost nothing.

The wage is what the employee earns. The employee’s cost is what your business spends to keep that person working. Confusing the two makes an ordinary hire look like a money-printing machine. Until payroll clears.

Start with the whole bill

Wage burden means the employer costs stacked on top of someone’s pay. A fully loaded employee cost goes further: it includes the benefits, equipment and other expenses needed to put that person to work.

Here’s an illustrative annual budget for a full-time service technician earning $25 an hour. Assume 40 paid hours a week for 52 weeks, with no overtime.

• Wages: $25 × 2,080 hours = $52,000.
• Employer payroll taxes: $4,400.
• Workers’ compensation and incremental liability insurance: $3,600.
• Employer health benefits and retirement contributions: $6,000.
• Tools, uniforms, phone and safety equipment: $3,000.
• Outside training and certification fees: $1,000.
• Total annual employee cost: $70,000.

Those are example costs, not universal benchmarks. Payroll taxes depend on location and applicable limits. Workers’ compensation depends heavily on the work performed and your claims history. A roofer and a receptionist do not come with the same insurance bill.

In this example, the employee costs $18,000 beyond wages. That’s a 34.6% addition to base pay.

Your number might be lower. It might be much higher. Pull it from actual payroll reports, benefit invoices and insurance documents. Don’t borrow a percentage from somebody who runs a completely different business.

Two hourly rates. Two different answers.

Divide that $70,000 by 2,080 paid hours:

Cost per paid hour: $33.65.

That’s useful for budgeting payroll and comparing staffing options. But customers don’t necessarily buy every hour you pay for.

Some hours go to holidays. Some go to training. Some disappear into gaps between appointments, supply runs and waiting for someone to answer the damn door.

For this example, assume the technician’s year looks like this:

• Total paid hours: 2,080.
• Paid holidays and leave: 160 hours.
• Training and internal meetings: 80 hours.
• Travel and setup not directly recovered in job hours: 240 hours.
• Unfilled schedule time and other downtime: 200 hours.
• Remaining productive job hours: 1,400.

Now divide $70,000 by 1,400:

Loaded cost per productive hour: $50.

That’s the rate this business needs when estimating technician labor against those productive job hours.

Define productive hours to match how you estimate and sell work. If travel and setup are already included in your chargeable job hours, keep them in the denominator. Don’t remove them and then charge the same cost again elsewhere.

For a shop or clinic, the equivalent might be repair hours or staffed treatment hours. For an office employee, use paid hours and workload capacity instead of inventing billable hours that don’t exist.

Don’t count the same cost twice

Paid leave creates a common spreadsheet mess.

Our $52,000 wage figure already pays the employee for all 2,080 hours, including the assumed paid leave. We accounted for leave by reducing productive hours. Adding another $4,000 for those same 160 hours would count that pay twice.

Training follows the same rule. The $1,000 above covers outside fees. The employee’s wages during training are already in annual pay.

Keep shared overhead separate and consistent, too. Rent, office salaries and general software still need covering, but they aren’t automatically part of this employee-specific calculation. A dedicated van may belong in the technician’s loaded cost. If you include it there, don’t also recover the same expense through a separate vehicle allocation.

Turnover adds another layer. Recruiting, onboarding and temporary coverage cost real money. Include a reasonable annual allowance when budgeting a team, or show those costs separately when evaluating a replacement hire. Just label what you’re doing.

The goal isn’t a bigger number. It’s a defensible one.

Put the rate against actual work

Suppose you sell a job for $900. It takes six productive technician hours and $200 in materials.

Using the wage alone, you’d calculate $150 in labor and think the job leaves $550 before overhead.

Using the loaded productive rate, labor costs $300. The job leaves $400, producing a gross margin of 44.4%, assuming these are all its direct costs.

That $400 is not net profit. It still has to help cover the office, marketing and other overhead.

If you choose a 45% gross margin target for this example, pricing starts at $500 divided by 0.55, or about $909. The target is a management decision, not an industry rule.

The calculation also exposes scheduling opportunities. Recover 100 genuinely saleable hours without adding annual cost, and $70,000 divided by 1,500 becomes $46.67 per productive hour. That improvement only matters if you can sell and complete the work. An empty calendar doesn’t become valuable because you renamed it capacity.

Fix this first on Monday

Pick one common employee role. Don’t rebuild the entire company spreadsheet before lunch.

• Pull annual wages, employer taxes, benefits and role-specific expenses.
• Use time records to separate paid hours from productive job hours.
• Calculate both hourly rates. Label them clearly.
• Recheck three completed jobs using the productive rate.
• Fix the biggest mismatch: estimating hours, unrecovered travel, schedule gaps or the quoted price.

Start with the cost you’ve been leaving out. You can’t make a sensible hiring decision with half an employee on the spreadsheet.