How to Budget for Salaries

by Lisa Magloff

To create a budget for employee salaries in your business, you need to determine how much each employee is going to cost you. Setting the basic salary range for each position is only the first step, you also need to determine how much you will be paying in taxes, insurance and benefits on each employee. Once you have done this, you can determine how much money you will need to budget for each employee. There is no generic model for determining employee costs as they are different in each industry, and for each company.

1. Collect information on what you are currently paying each employee, and on how many employees will be receiving raises or bonuses in the coming year. Make sure you include salaries for any new employees you plan to hire.

2. Determine your federal tax costs for each employee. You will need to pay a 6.2 percent social security/Federal Insurance Contributions Act (FICA) tax on all annual salaries up to $90,000. You will also need a Medicare tax of 1.45 percent on all salaries, and an unemployment tax of 6.2 percent on all salaries of $7,000 and higher.

3. Contact your state's labor department to find out which state taxes you are responsible for paying. This may include a state unemployment tax. Keep in mind that if you pay a state unemployment tax, your federal unemployment tax contribution may be reduced.

4. Budget for workers' compensation insurance. You may not need this, depending on your business, and the costs will vary from one industry to the next. For example, workers compensation insurance will be higher for the construction industry than for a less hazardous business. Contact an insurance agent and ask for a quote.

5. Decide what benefits you will provide for your employees, and determine the cost of these benefits. For example, you may want to offer life insurance, disability insurance, dental plans, health insurance coverage, retirement plans or child care. Some of these, such as 401k retirement plans, are employee-paid. But others, such as health insurance, will come out of your budget. Remember that there will also be administrative costs associated with each benefit.

6. Factor in an amount for recruitment costs. These include the cost of advertising a position and the time involved in interviewing, and in training new hires.

7. Add up all of the figures in the previous steps for each employee to determine the total cost of your employees. Factor in an addition amount, such as 10 percent of the total, to cover unforeseen events.

8. Use metrics to make the calculations easier. For example, the typical employee costs between 1.25 and 1.4 times their base salary. Simply multiply each salary in your business by 1.25 to 1.4 to come up with an estimate of the total cost per employee. Or use an average per employee. According to the U.S. Bureau of Labor Statistics, average total employee compensation by region, as of 2011, is $24.93 per hour in southern states, $32.16 per hour in the Northeast, $29.95 in the West, $27.47 in the Midwest, $22.65 in East South Central and $33.56 in New England.


  • You may also want to budget for additional employee costs, such as providing office space, computers and phones to your employees.

Items you will need

  • Salary information for all employees
  • Information on state and federal tax rates
  • Costs of benefits packages
  • Information on insurance costs

About the Author

Since graduating with a degree in biology, Lisa Magloff has worked in many countries. Accordingly, she specializes in writing about science and travel and has written for publications as diverse as the "Snowmass Sun" and "Caterer Middle East." With numerous published books and newspaper and magazine articles to her credit, Magloff has an eclectic knowledge of everything from cooking to nuclear reactor maintenance.

Photo Credits

  • Brand X Pictures/Brand X Pictures/Getty Images