The True Cost of an Employee: What the Salary Doesn’t Show

Most business owners know that hiring someone costs more than their advertised salary. What most of them underestimate is how much more.

This calculator attempts to put a real number on it. I’d encourage you to use it. But before you do, it’s worth understanding what’s actually being calculated – the logic will really help you in the future.

The Starting Point: It’s Already More Than You Think

Say you hire someone on a $70,000 salary. Before they’ve done a single hour of work, you’re already up to roughly $80,000 in employment cost.

Here’s why.

Australia mandates a superannuation contribution of 12% on top of base salary (always check updated rates). That’s $8,400. Then there’s workers compensation insurance, which varies by industry but averages around 1.8% of wages. Add another $1,260.

So your $70,000 staff member costs you about $79,660 before you’ve switched on the office lights. Round it to $80,000 for simplicity and keep going, because we’re only at the beginning.

One-Off Setup Costs: The Bill You Only Pay Once (But Still Pay)

Most financial models treat employment as a recurring cost, which is a great first step. But let’s not forget the initial hiring costs, as these need to be integrated into your finances – especially if staff don’t last very long.

These costs vary depending on the role, but for most knowledge-based or service businesses, a realistic list looks like this:

Computer and peripherals — A decent business laptop runs $1,500 to $2,500. Add a monitor, keyboard, mouse, and docking station and you’re at $2,000 to $3,500 before you’ve installed anything on it.

Software setup — Depending on your stack, a new licence for each tool you use adds up fast. Business software, project management tools, communication platforms, accounting access, file storage — $500 to $2,000 in year one is common, and that’s before any specialist software relevant to their role.

Ergonomics — A properly adjusted workstation isn’t optional if you want to avoid a workers compensation claim twelve months in. Chair, desk, footrest, monitor arm — budget $800 to $2,000 for a setup that will maximize productivity and keep claims at bay.

Lockable cabinetry and personal storage — Often forgotten until it’s needed. If your business handles client records, sensitive documents, or just needs to meet basic security obligations, add another $300 to $600. Every staff member needs some modicum of private storage at work.

A conservative total for one-off setup: $5,000 to $8,000. Spread over a two-year employment period (a fairly standard early-tenure window), that’s another $2,500 to $4,000 per year on top of the recurring costs.

The Hidden Annual Costs: Where the True Cost of an Employee Really Lives

This is the section that surprises people the most. And it’s where most hiring decisions are quietly made on incomplete numbers.

Recruitment Cost – If you use a recruiter, that’s up to 20% of the basic salary in initial fees. If you don’t, you still need to spend quite a bit of job advertising and interviewing.

Training and onboarding — Even if your onboarding is well-documented (and most aren’t), a new employee needs time to get productive. That’s time you or another team member spends teaching, checking, re-explaining, and correcting. It has a cost, even if it doesn’t appear on an invoice. Formal training costs — courses, certifications, subscriptions — add to this.

Statutory and non-job training — First aid certification, fire warden training, manual handling courses, privacy compliance training. These exist in most businesses and most industries. They’re often annual. They cost time and money. Budget $500 to $1,500 per year depending on your sector.

Space — If you have a physical office, every desk has a cost. Divide your monthly rent by the number of workstations and you’ll find a per-person occupancy cost that surprises most business owners. A modest serviced office or commercial lease can represent $2,000 to $15,000 per desk per year once outgoings are included.

Bonuses and benefits — Even if they’re not contractual, most staff expect something at Christmas, at review time, or when a milestone is hit. Staff gifts, team lunches, birthday gestures. These feel small individually. They add up.

Annual salary increases — Inflation expectations mean most employees expect a pay rise every year. Even a 3.5% annual increase on a $70,000 base is $2,450 in year two, compounding upward from there. Staff expect more than inflation – a lot more.

Annual software subscriptions — Beyond the setup costs, most software is billed annually. And as your team grows, so does your licence count. CRM seats, project management tiers, communication platform billing — these scale with headcount in ways that are easy to overlook.

Tool rental or equipment hire — Depending on your industry, there may be tools, equipment, or vehicles that the new role requires access to. Even partial allocation of shared resources needs to be counted.

A realistic hidden annual cost figure for a mid-level knowledge worker, once all of this is added together, sits somewhere between $10,000 and $25,000 per year on top of salary and the mandatory on-costs. In some cases, annual hidden costs exceed the basic salary.

Which means your $70,000 employee might actually be costing your business $100,000 to $115,000 per year to employ. The true cost of an employee is almost always in that range — and often higher for trade-based or clinical roles.

The Part Most Calculators Skip: The Break-Even Revenue Requirement

Once you know the true annual cost of an employee, you need to go one step further. You need to work out how much revenue that staff member has to generate before your business breaks even on them.

This isn’t the same question as “are they doing their job?” It’s the more important question: “Is this business better off with them than without them?”

To answer it, you have to apply your gross profit margin (excluding the cost of the staff member themself).

If your business runs at a 60% gross margin, and your employee costs $105,000 per year all-in, then the business needs to generate $175,000 in revenue attributable to their work just to cover what they cost. That’s just break-even. There’s no profit in that number yet.

In practice, many employed staff members don’t directly generate revenue — they support the people who do, or they fulfil work that the owner was previously doing. In those cases, the calculation shifts to: how much additional capacity does their presence create, and can the business actually sell that capacity?

That’s a harder number to find. And it’s often the one that doesn’t get estimated before the offer letter goes out.

A rule of thumb that holds up well for most service businesses: a staff member typically only reaches break-even at 1.7 to 2 times their annual salary in generated or attributed revenue. To actually contribute profit to the business – as opposed to simply covering themselves – that revenue-to-salary ratio often needs to be 2.5 to 3 or higher. It’s very easy for a new business owner to underestimate just how expensive a staff member is before they generate profit.

For a pure service business with very lost cost-of-sales, a 3:1 ratio is a sensible starting point. It leaves some meat on the bone for promotions. Anything below 2:1 and you should be asking whether the role is genuinely viable — or whether you’ve hired a vanity cost.

What This Means for Your Hiring Decision

None of this is an argument against hiring. The right employee, at the right time, in the right role, can absolutely justify their cost and generate real leverage for a business.

But the decision needs to be feasible, and needs to generate real, massive revenue. It needs to be sustainable and scalable. And just as importantly: they need to be replaceable when natural staff churn occurs.

Before the next offer letter goes out, it’s worth running the full calculation — not just on salary, but on every layer of cost that sits above, below, and around it. The true cost of an employee is almost always higher than gut feel suggests. And the revenue required to justify them is almost always higher than that. You must have that sales channel ready to deliver.

The calculator on this page is just a starting point. It’s not a substitute for your accountant’s financial advice – make sure you don’t stop here.

If you’re working through a hiring decision and want a second set of eyes on the financial logic, the Should You Hire Staff? article is worth a read — it covers the decision from a different but complementary angle, including when a contractor or a systems investment might be a smarter move than employment.