Hiring Your First Employee: The Fully-Loaded W-2 Cost Is Often 39% Above Base Salary

We ran an $80K first hire through this and the “salary” was only 72% of the real cost

Offer an $80,000 salary, and the number a first-time founder budgets is $80,000. The number that actually leaves the business account is higher: 8.65% employer payroll tax ($6,920 — the fixed 7.65% FICA match plus roughly 1% for FUTA/SUTA unemployment insurance) plus a 30% benefits load ($24,000 for health insurance, PTO, and a modest retirement match) brings the true annual cost to $110,920. That’s 38.65% above the salary number, not a rounding error.

Compare that $110,920 fully-loaded cost against a contractor quoting $95,000 for equivalent output, and the contractor is $15,920/year cheaper — even though their headline rate looks higher than the $80K salary number most founders anchor on. The comparison only makes sense when both sides are apples-to-apples: the contractor’s quoted rate already bakes in their own self-employment tax and benefits, so no additional load gets added to it.

How the math works

1. Employer payroll tax = base salary × payroll tax rate (default 8.65%: 7.65% FICA employer match + ~1% blended FUTA/SUTA).
2. Benefits load = base salary × benefits load rate (default 30%).
3. Employee total annual cost = base salary + payroll tax + benefits load.
4. Breakeven contractor rate = employee total annual cost — the exact rate at which a contractor and an employee cost the same.

Sources: IRS Publication 15 (Circular E) for the FICA/FUTA structure, 2026 FUTA effective-rate guidance, and Bureau of Labor Statistics Employer Costs for Employee Compensation reporting for the benefits-load-as-percent-of-wages framing (commonly cited as pushing total employer cost to 1.25-1.4x base salary).

The honest limit: this compares dollars only. It doesn’t model differences in reliability, availability, IP ownership, or the ability to direct day-to-day work — real factors that push some hiring decisions toward W-2 employment even when a contractor is cheaper on paper.

Math runs locally. Inputs never leave your browser. Source on github.

Where this comparison doesn’t apply

• Worker classification isn’t actually your choice. The IRS and Department of Labor use behavioral, financial, and relationship tests to determine whether someone is legally an employee or a contractor — misclassifying an employee as a 1099 contractor to save money carries real penalty risk regardless of what the cost comparison shows.
• You need ongoing direction and control over the work. Contractors are generally expected to control how they do the work; if you need to direct day-to-day tasks, set hours, and provide equipment, that points toward employee classification independent of cost.
• Your state has its own payroll tax quirks. SUTA rates and wage bases vary significantly by state — this tool’s default blended rate is a reasonable estimate, not your state’s actual number.
• You value the retention and culture benefits of employment. Some founders pay a cost premium for employees deliberately, valuing loyalty, equity participation, and long-term investment in the company over a pure cost comparison.

What to actually do

1. Check your actual state’s SUTA rate and wage base rather than relying on the default blended estimate.
2. Get a real quote for benefits (health insurance especially) rather than guessing the load percentage.
3. Confirm the worker’s classification is legally correct before deciding based on cost — the IRS’s common-law test, not the cheaper number, decides this.
4. If the numbers are close, weigh the non-dollar factors (control, retention, equity) rather than defaulting to whichever option is marginally cheaper.