Read the full cost of pay

The full cost of employing someone adds to the wage the employer obligations looked up for the business's own jurisdiction, paid leave, and training and equipment; the full cost of a paid hour is what decisions must use.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will build the full weekly cost of employing someone from the wage, looked-up employer obligations, paid leave and training, turn it into the full cost of a paid hour, and tell honest handling of obligations from a rate carried across borders.

2. What you already have

Earlier courses costed a unit of work with an hourly rate. When the hours are an employee's, the rate that matters is not the wage but what an hour of their employment really costs the business.

3. Words for this lesson

4. The wage is not the cost

Neighborhood Kitchen pays a kitchen assistant 16 dollars an hour for 25 hours a week: a wage of 400 dollars. The owner has looked up the employer obligations due on that pay in her state and written them down: 40 dollars a week. She sets aside 32 dollars a week for the assistant's paid leave, and spends 8 a week on training and kitchen whites.

$$\text{full weekly cost} = \text{wage} + \text{obligations} + \text{leave} + \text{training and equipment}$$

400 + 40 + 32 + 8 = 480 dollars a week. Divided by the 25 paid hours, the full cost of an hour is 19.20 dollars, not 16. Any decision about whether the assistant's work pays for itself has to use 19.20.

Notice how the obligations appear: as a dollar figure the owner looked up for her own state. This course never gives a percentage for them, because rates change and parts of them differ by state. Employment rules — pay, leave, contracts, working time, safety, ending employment — are set where the business operates and change over time. Look up the current rule from an official source for your own jurisdiction, and note the source and the date you checked it.

Term	What it means
Wage	The hourly rate times the hours worked.
Employer obligations	Amounts the employer must pay on top of wages, set by law where it operates.
Paid leave	Time off the employee is paid for, set aside in advance.
Full weekly cost	Wage plus obligations, leave, and training and equipment.
Full cost of an hour	The full weekly cost over the paid hours.
Take-home pay	What the employee receives after deductions: not the cost.

Another way: table

The full cost of a kitchen assistant, one week.

Item	Dollars
Wage: 16 × 25 hours	400
Employer obligations (looked up)	40
Paid leave set aside	32
Training and whites	8
Full cost	480
Per paid hour	19.20

Another way: steps

Multiply the hourly rate by the hours for the wage.
Look up the employer obligations for your state, and write them in dollars.
Set aside paid leave, by law and by your policy.
Add training and equipment.
Add them all for the full weekly cost.
Divide by the paid hours for the full cost of an hour.

5. Use the full hour in every decision

The full cost of an hour belongs everywhere a wage used to. When Bright Home Cleaning prices a two-hour clean, the cleaner's two hours cost 2 × 22 = 44 dollars at the full rate, not 2 × 18 = 36 at the wage; a price set on the wage quietly loses 8 dollars on every clean. When Maya decides whether an assistant is worth hiring for the packing, she compares the full cost of the assistant's hours with what her freed hours earn.

6. What the obligations are, in the United States

In the United States, an employer's obligations on wages usually include its share of Social Security and Medicare taxes, federal unemployment tax, state unemployment insurance, and workers' compensation insurance, which most states require. Some states and cities add more, such as paid family leave contributions or disability insurance.

The rates, wage limits and rules change, and several of them depend on the state and on the business's own history. So the course does not quote them. Look them up each year from official sources, such as the IRS employer tax guide and the state's labor and revenue departments, or ask an accountant who works in the state, and write the result as dollars a week for each employee, with the source and the date beside it.

7. The method, step by step, and how to check it

Find the wage. The hourly rate times the paid hours in a normal week. Include any overtime the role normally works, at the overtime rate the law requires.

Look up the obligations. For this employee, in this state, this year. Write each one in dollars a week.

Set aside leave. The paid time off the employee will take, from the law where it requires paid leave and from the business's own policy, spread across the weeks of the year.

Add training and equipment. Spread first-year training and any uniform or tools across the weeks.

Total and divide. Add all four for the full weekly cost; divide by the paid hours for the full cost of an hour.

Check the figure. The full hour must be higher than the wage. Each obligations figure must have a source and a date. And the hours you divide by must be the hours worked, not the hours paid including leave, or the leave is counted twice.

8. Why each step is allowed

Adding obligations to the wage is allowed because the business pays them because it employs the person. They would not exist without the role, so they are part of its cost.

Setting aside leave weekly is allowed, and needed, because leave is paid when it is taken, often in a lump. Spreading it across the year shows the true weekly cost and keeps the cash ready.

Dividing by hours worked is allowed because the decisions that use the figure, such as pricing a clean or valuing a freed hour, are about hours of work. An hour of leave produces no work but still has to be paid for, so its cost is carried by the hours that are worked.

9. Employee or contractor

Some owners try to avoid these costs by treating workers as independent contractors. Whether someone is an employee or a contractor is not the owner's choice; it depends on how the work is controlled, under federal and state tests. Someone who works set hours, to the business's standard work, with the business's tools, is usually an employee, whatever the paperwork says.

Misclassifying an employee can bring back taxes, penalties and claims for unpaid overtime. If a role might be either, check the IRS and Department of Labor guidance, or ask an employment lawyer, before deciding.

10. Keep the figures current

Obligations change, usually once a year; paid leave depends on the rules and on the business's own policy; training costs are heaviest in the first months. Note where each figure came from and when it was checked, so a figure copied from last year, or from a friend's business in another state, does not creep in.

Recompute the full hour each January and whenever a wage changes. The prices, the capacity costs and the delegation decisions that rest on it change with it.

11. Overtime and part-time hours

Two details change the full hour often enough to check every time. Overtime: under federal law, most hourly employees must be paid at least one and a half times their regular rate for hours over forty in a week, and some states add daily overtime. A role that regularly runs to forty-five hours has a higher full cost per hour than its rate suggests, because the last five hours cost half as much again.

Part-time hours: some costs do not shrink with the hours. A uniform, a training course or a background check costs the same for a ten-hour helper as for a forty-hour one, so spread over fewer hours they add more to each. A ten-hour role's full hour is often noticeably higher than a full-time role's at the same wage. Work it out before deciding between one full-time person and two part-timers. The cheaper option on the wage is not always the cheaper option on the full hour, and the difference can decide which roles a small business should create. Put both options into the same table, with the full weekly cost and the full cost of an hour for each, and let the figures make the case before anyone is hired or any role is advertised to anyone.

12. The owner's own pay

Keep the owner's own pay separate from these figures. Whether it appears as a wage in the accounts depends on the form of the business: a sole proprietor's draw is not a wage, while an owner of a corporation who works in it may be required to take one. That is a question for the business's accountant.

For decisions, the owner's hours are still a costing input, as in the delegation lesson: what those hours could earn elsewhere in the business. That figure is used to weigh choices, not added to the payroll costs here.

13. In the world: a Tucson landscaping company reprices its crews

A landscaping company in Tucson priced its jobs at crew hours times the workers' wage, about 17 dollars an hour, plus materials and a margin. Its jobs were busy and its bank balance kept shrinking. When its accountant worked out the full cost of a crew hour, the picture changed.

On top of the wage, the company paid its share of Social Security and Medicare, federal and state unemployment taxes, and workers' compensation insurance, which for landscaping was a large item. The owner looked up each for Arizona that year and wrote them down in dollars. Paid sick time, required by Arizona law, and the company's own vacation policy were set aside weekly, and training and safety equipment were spread across the year. Together they came to about 4.50 dollars an hour, so the full cost was about 21.50.

On a typical 24-crew-hour job, the old pricing had left out about 108 dollars. The owner repriced every quote on the full hour, lost two low-margin customers, and within a season was making money on the work the crews were already doing.

14. In the world: the IRS employer's tax guide

The IRS publishes an annual employer's tax guide, Publication 15, that explains federal withholding and the employer's share of Social Security and Medicare taxes and federal unemployment tax. State labor and revenue departments publish their own guides for state unemployment insurance and other state obligations.

15. Where this goes wrong

The wage is the whole cost of employing someone. Obligations, leave and training come on top.

Use the employee's take-home pay. That is what they receive, not what the business pays.

Obligations are the same everywhere. Parts are set by state and all change; look them up.

Leave costs nothing because no work is done. It is paid time, and must be set aside for.

Calling someone a contractor removes the costs. The law decides, by how the work is done.

16. Monica's Saturday helper

17. Bright Home Cleaning's new cleaner

18. Neighborhood Kitchen's kitchen assistant

19. Your turn: Northside Repairs' helper

20. Guided practice

Neighborhood Kitchen's owner says, 'A helper costs $17$ dollars an hour, so a lunch shift of four hours costs $68$ dollars.' What is wrong with the calculation?

21. Guided practice

Complete the worked solution: Maya will pay a studio assistant $19$ dollars an hour for $20$ hours a week. She has looked up the employer obligations for her state and written them down as $60$ dollars a week; she will set aside $20$ dollars a week for paid leave and spend $20$ dollars a week on training and equipment. Find the weekly wage, the full weekly cost, and the full cost of a paid hour.

22. Guided practice

23. Practice

Bright Home Cleaning pays a cleaner $18$ dollars an hour for $30$ hours a week. For its own jurisdiction, the owner has looked up the employer obligations due on that pay and written them down as $54$ dollars a week. It also sets aside $45$ dollars a week for paid leave and spends $21$ dollars a week on training and equipment. Fill in the weekly wage and the full weekly cost, in dollars.

24. Practice

Maya's Ceramics pays a studio assistant $17$ dollars an hour for $20$ hours a week. For its own jurisdiction, the owner has looked up the employer obligations due on that pay and written them down as $34$ dollars a week. It also sets aside $26$ dollars a week for paid leave and spends $20$ dollars a week on training and equipment. What does one paid hour really cost the business, in dollars?

25. Practice

Bright Home Cleaning prices its cleans on the cleaner's wage of $19$ dollars an hour, but the full cost of a paid hour is $22$ dollars. A clean takes $3$ hours. How many dollars does each clean quietly lose because the price used the wage?

26. Practice

A daycare center in Columbus pays an aide $15$ dollars an hour for $30$ hours a week. The director has looked up the employer obligations for Ohio and added the leave set aside and the aide's training; together they come to $120$ dollars a week on top of the wage. What does one $4$-hour shift of the aide's work really cost the center, in dollars? Fill in each figure on the sheet.

27. Somewhere new

Notes from four small-business owners about employer obligations. Mark every note that handles them honestly.

28. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

29. Test question

Northside Repairs is costing a Saturday helper at $22$ dollars an hour for $28$ hours a week. Dev has looked up the employer obligations for his state and written them down as $35$ dollars a week; he will set aside $30$ dollars a week for paid leave and spend $7$ on training and equipment. Complete the sentence.

30. What you can do now

You can say what an hour of an employee's work really costs, and where each figure came from. Tell someone why a wage-based price quietly loses money. Next: which people decisions need a current local rule.

	The wage	A cost on top of the wage	Not a cost of employing this person
$15$ dollars an hour for hours worked
Employer obligations due on the pay, looked up for the jurisdiction
Paid leave set aside each week
Fuel for the van the whole team uses

	Amount
Extra costs per hour, dollars
Full cost of an hour, dollars
Full cost of the shift, dollars