Calculate the true total cost of an employee including salary, payroll taxes, benefits, and overhead expenses.
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A Texas-based freelance graphic designer earns $140,000 net profit/year from client work. She's evaluating whether to stay as a sole proprietor, form an LLC, or elect S-Corp status to reduce self-employment taxes.
Takeaway: S-Corp saves $8,300/year but adds ~$1,500-$3,000 in accounting fees (payroll, extra returns). Break-even is around $80-90K net profit. Below that, the overhead eats the savings. Texas has no state income tax, so the benefit is purely federal SE savings.
LLC annual fees range from $0 (Ohio) to $800 minimum (California, even for zero-revenue LLCs). Delaware C-Corp is standard for VC-backed companies but adds registered agent costs (~$300/yr) for out-of-state entities. The "best" structure is state-specific.
S-Corps cannot have more than 100 shareholders, cannot have non-US shareholders, and cannot have corporate shareholders. Violating these rules (e.g., adding a foreign investor) terminates S-Corp status retroactively, potentially creating a large unexpected tax event.
The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" before taking distributions. There is no fixed formula — the IRS looks at industry benchmarks, duties, and hours worked. Setting the salary too low is a common audit trigger for S-Corps.
Business break-even models track revenue vs. direct costs. They rarely factor in the owner's time as a cost. If you're working 60 hours/week at imputed $50/hour, your "profitable" business may be paying you $12/hour after the opportunity cost calculation.
Break-Even CalculatorA service business valued on EBITDA multiples (2-4×) gets a very different number than one valued on SDE (seller's discretionary earnings) or discounted cash flow. Buyers and sellers typically use different methods to argue their preferred price. This calculator uses a single method.
Business Valuation CalculatorBased on your inputs
1.32× base salary
| Base Salary | $60,000 |
|---|---|
| Social Security (6.2%) | $3,720 |
| Medicare (1.45%) | $870 |
| FUTA + SUTA | $609 |
| Total Payroll Taxes | $5,199 |
| Benefits Total | $9,300 |
| Overhead | $5,000 |
| Total Annual Cost | $79,499 |
| Monthly Cost | $6,625 |
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An employee typically costs 1.25–1.4× their salary when you include payroll taxes, benefits, equipment, and overhead.
Employers pay: Social Security (6.2% up to $160,200), Medicare (1.45%), FUTA (6% on first $7,000), and SUTA (varies by state, avg 2.7%).
Health insurance: $6,000–$12,000/yr. Dental/vision: $500–$1,500/yr. 401(k) match: 3–6% of salary. PTO, life insurance, and other perks add more.
Office space, equipment, software licenses, training, HR administration, and workers' compensation insurance all add to total cost.
Average employer-sponsored health insurance costs $8,435 for individual coverage and $23,968 for family coverage annually (2024). Employers typically pay 80-85% of individual premiums and 70-75% of family premiums.
Each PTO day costs the employer one day's salary while receiving no productive work. An employee earning $60,000 with 15 PTO days costs roughly $3,460 in paid non-working time annually.
Recruiting and onboarding a new employee costs $4,000-$7,000 on average. Senior or specialized roles can cost 50-200% of annual salary when including recruiting fees, training, and lost productivity.
Employers pay 7.65% of each employee's wages: 6.2% for Social Security (up to $168,600 in 2024) and 1.45% for Medicare. This matches the employee's contribution for a combined 15.3%.
Divide total annual cost (salary + taxes + benefits + overhead) by actual productive hours (typically 1,800-1,900 after PTO and holidays). An $60,000 salary often equals $40-$50 per productive hour.
Replacing an employee costs 50-200% of their annual salary when factoring in recruiting, hiring, onboarding, training, and lost productivity during the transition. Reducing turnover through competitive pay and benefits often saves more than the additional expense.
Total Cost = Salary + Payroll Taxes + Benefits + Overhead
Payroll Taxes ≈ 10–12% of salary (SS 6.2%, Medicare 1.45%, FUTA, SUTA)
Every formula on this page traces to a federal agency, central bank, or peer-reviewed institution. We cite the rule-makers, not secondhand blogs.
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Calculations are for educational purposes only. Consult a qualified financial advisor for personalized advice.