A $20 an hour employee costs $21.55 an hour, before benefits
· 4 min read
An employer who offers $20 an hour does not pay $20 an hour. Three federal taxes are charged to the employer on top of the wage, and they add about $1.55 to every hour before a state tax, an insurance premium or a day of paid leave has been counted.
The year, worked through
Forty hours a week for fifty-two weeks is 2,080 hours, so $20 an hour is $41,600 a year in pay. On that pay the employer owes:
- Social Security, 6.2%: $2,579.20. This is the employer’s own share, separate from the 6.2% withheld from the employee.
- Medicare, 1.45%: $603.20, again on top of what the employee pays.
- Federal unemployment tax: $42.00. The rate is 6.0% of the first $7,000 paid to each employee, and most employers get a credit of 5.4% for paying state unemployment tax, which leaves 0.6% of $7,000.
That is $3,224.40 on top of $41,600: $44,824 for the year, or $21.55 for each hour worked. The federal taxes alone add 7.75% to the wage.
The rates are the government’s, and they can change. The IRS publishes the Social Security and Medicare rates on Topic 751 and the unemployment tax on Topic 759. Check them before relying on any figure here.
Two of those taxes have a ceiling
Federal unemployment tax stops at $7,000 of pay, so it is the same $42 for a part-timer who earns $7,000 in the year and for a manager on $200,000. It is a cost per person, not per dollar, which is why it weighs more on a business with many part-time staff than on one with a few full-time ones.
Social Security stops much higher, at $184,500 of pay in 2026. On a $250,000 salary the employer’s share is $11,439, the same as on $184,500. Medicare has no ceiling at all.
What the federal figure leaves out
$44,824 is the floor. Almost every employer pays more, and how much more depends on things only that employer knows:
- State unemployment tax. Each state sets its own rate and the amount of pay it applies to, and the rate moves with the employer’s own history of claims. A new business is given a starting rate by its state.
- Workers’ compensation insurance. Priced by the kind of work. An office and a roofing crew pay very different rates.
- Benefits. The employer’s share of health insurance, and any retirement contribution.
- Paid time off. Already inside the $41,600 if the leave is paid, but it means fewer than 2,080 hours are actually worked, so the cost of each working hour is higher than $21.55.
To see how quickly those move the total, take one set of example figures. They are an illustration, not typical values: a state unemployment rate of 2.7% on the first $9,000 of pay is $243, $6,000 a year towards health cover, and a 3% retirement contribution is $1,248.
With those added, the same $20 an hour employee costs $52,315 a year, which is $25.15 an hour and 25.8% more than the wage.
Run it with your own figures
The employee cost calculator does this arithmetic for any wage. The federal rates are fields you can check against the IRS pages and change, and the state tax, benefits and other costs are yours to enter. It estimates cost. It does not say whether to hire, and it does not cover a contractor, which is a separate legal question.
