Calculating the true cost of an employee

Calculating the true cost of an employee

Employing staff is a big step if you have never done it before. It isn’t as simple as just paying their wages. Before you take that leap, best get some insights into the actual cost of employing individuals within your organisation. Congratulations though, hiring quality talent and extra help will mean more growth and more happy customers. The following steps will help you more accurately calculate the total remuneration expenses and hidden costs associated with having an employee on board.

Steps 1-3: Direct Remuneration Costs Entry

Step 1: Basic Annual Salary and Hours

Begin by entering the employee’s contractual Basic Gross Salary before any deductions. If you have part-time employees, provide their annual pay and the number of hours worked per week. The calculator will automatically compute the Hourly Rate of pay based on this information. Additionally, input the National Insurance (NI) Letter Code, typically set to ‘A’ by default, but adjust if needed to reflect the employee’s specific NI Code Letter.

Step 2: Enter Additional Payments In Step 2, input any additional payments, such as Annual Bonuses, Commissions, Overtime, and other taxable earnings. The calculator will display the Total Taxable Income and calculate the Employer’s (Secondary) NI Contribution based on the selected NI Letter Code, presenting the Total Salary Cost.

Step 3: Enter Optional Benefits This section allows you to input other taxable benefits, considering factors like Workplace Pension contributions and Salary Sacrifice Schemes. The calculator will reveal the Benefit in Kind Class 1A NICs (P11D) at a rate of 13.8%. It will also show the Total Payroll Cost, which encompasses the direct cost of employee remuneration, including benefits, as well as the Employer’s NI Contributions.

Unveiling the Hidden Costs

Step 4: Enter Facilities and Other Costs Step 4 focuses on individual-specific costs such as software, IT resources, and training, which may not always be apparent but contribute to the overall expenses associated with an employee.

Step 5: Enter Apportionment of Office Costs Capture the general business costs shared by all employees in Step 5. These costs, though often overlooked, can significantly impact your calculations.

Step 6: Enter Other Costs and Potential Liabilities Step 6 lets you account for miscellaneous costs and potential future liabilities, providing a holistic view of the financial aspects of employment.

Step 7: Enter Holidays and other lost time In this section, you can consider the impact of holidays, sickness, and wasted/unproductive time on employee costs. Enter the appropriate figures for holiday entitlement, sickness rates, and unproductive time based on your organization’s circumstances.

Unveiling the True Cost of an Employee

The True Cost section reveals the actual cost per year, per day, and per hour, offering a comprehensive perspective on the expenses associated with an employee. It will also display the multiple of salary, illustrating that the True Cost of an Employee is often greater than 1.7 times their basic salary.

Please note that the calculator may include National Insurance for employees under the age of 20, even though it is typically not applicable in most cases for this age group.

By following these steps and utilising the Engage & Prosper True Cost of an Employee calculator, you can gain valuable insights into the true financial implications of your workforce, enabling informed decision-making and resource allocation within your organisation.