What an hour of work actually costs once someone is on payroll

An hour of work costs the wage plus employer payroll taxes, unemployment insurance, workers compensation and paid sick leave, and then its share of your monthly running costs. At a $27.50 wage in California that is $42.57 an hour, not $27.50 — about 55 per cent more than the number most owners price from.

The five things that attach to a wage

On a contractor arrangement an hour cost the wage and nothing else. On payroll, four things are charged on top of every wage dollar, and a fifth was always there but is easier to see once it is spread across the hours.

  • Employer Social Security and Medicare, 7.65 per cent
  • Federal and state unemployment, blended down because they stop above a wage cap
  • Workers compensation, charged per $100 of payroll and specific to your class and carrier
  • Paid sick leave, either one hour earned per thirty worked or a grant at the start of the year
  • Your running costs, divided by the labour hours you actually sell

Why unemployment is lower than the headline rate

Federal unemployment, state unemployment and any state training tax are all charged on the first several thousand dollars a person earns in a year, and nothing above it. Full-time staff pass that cap early and stop being taxed; seasonal staff never reach it and are taxed on everything.

So the rate a business actually pays is its taxable payroll over its total payroll, times the headline rate. In the worked example that turns 5.9 per cent into 5.35 per cent. It moves every time the shape of the crew changes.

Workers compensation can only be counted once

It is charged as a percentage of wages, so it belongs in the hourly figure. If it is also sitting inside an insurance bill in your running costs, you are counting it twice, your costs look several hundred dollars a month higher than they are, and every price built on that figure is too high.

Ask your broker for the policy split out line by line. It is the single most common error in this calculation.

Margin is on the price, not on the cost

A twenty per cent margin means price equals cost divided by 0.8, not cost times 1.2. Those are different numbers — 25 per cent markup against 20 per cent margin — and confusing them is how a business quietly works for nothing.

The worked example

Eleven cleaners in California, four of them seasonal, moving from contractor at $25.00 an hour to employee at $27.50. Running costs $1,407 a month across 196 labour hours.

An hour on payroll costs $35.39. Running costs add $7.18. The full cost of an hour is $42.57. A twenty per cent margin lands at $53.21, and the rate that leaves the owner exactly where they started is $54.98 — billed as $55.

Had they moved to payroll and left prices alone, they would have been $2,037 a month worse off for exactly the same work.

Sources

Employer Social Security and Medicare from the IRS. Federal unemployment including the state credit reduction, state unemployment and state training tax from the state employment department. Workers compensation from the published carrier range for the residential cleaning class. Paid sick leave from the state labour code. Each rate carries the date it was checked, and two of them move every January.