Hiring an employee is more expensive than just paying their monthly salary.
Many businesses underestimate the true cost of hiring an employee, forgetting about benefits, taxes, tools, and hidden expenses that quickly add up.
In this article, we’ll explain what employee cost really means and show you how to calculate it accurately, so you can plan better, stay profitable, and avoid budget surprises.
What Is Employee Cost?
Employee cost is the total amount a business spends on an employee beyond their wages.
This includes salary, benefits, recruitment, training, payroll taxes, and even the equipment they need to do their job.
Understanding employee cost matters because it helps businesses:
- Budget realistically without underestimating expenses.
- Stay sustainable by keeping payroll under control.
- Protect profitability by making smarter hiring decisions.
Key Components of Employee Cost
When calculating the true cost of hiring an employee, you need to factor in more than just the paycheck. Here are the main components:
1. Gross Salary
This is the employee’s base pay plus any extra earnings like overtime, performance bonuses, or commissions.
- Example: A software engineer earning $2,000 monthly may actually cost $2,500 when you add overtime and performance-based bonuses.
2. Benefits & Allowances
Employee perks are a big part of total cost. These include:
- Healthcare or medical insurance
- Pension or retirement contributions
- Housing or transport allowances
- Meal stipends or wellness programs
- Example: Offering healthcare at $150/month and transport allowance at $100/month adds $250 per employee, monthly.
3. Taxes & Compliance Costs
Employers must contribute to statutory payments such as payroll taxes, social security, or pension schemes (varies by country).
- Example: In many African countries, employers contribute between 5–15% of an employee’s salary toward mandatory pension and tax-related costs.
4. Recruitment & Onboarding
Finding and integrating new hires takes time and money:
- Job ads, recruitment agency fees, or HR staff hours
- Interviewing, background checks, and onboarding sessions
- Initial training and certifications
- Example: Filling one mid-level role can cost between $500–$2,000 depending on the recruitment process and time spent.
5. Work Tools & Infrastructure
Employees need tools to perform efficiently:
- Laptops, monitors, or mobile phones
- Software subscriptions (e.g., Microsoft 365, Slack, project management tools)
- Internet stipends or office space (if not fully remote)
- Example: Equipping one remote designer with a laptop ($800), Adobe license ($50/month), and internet stipend ($50/month) can total over $1,500 in the first year.
6. Hidden Costs
Some expenses are not immediately visible but impact the bottom line:
- Turnover costs if the employee leaves (re-hiring and retraining)
- Lost productivity during the first few months of onboarding
- Overtime or temporary cover when someone is absent
- Example: Research shows replacing an employee can cost up to 30–50% of their annual salary.
When you put all of these together, the real cost of an employee can be 1.25–1.5 times their base salary (and sometimes more depending on benefits and compliance requirements).
How to Calculate Employee Cost (Step-by-Step Guide)
The Simple Formula
At its core:
Employee Cost = {Salary} + {Benefits} + {Taxes} + {Tools/Overheads} + {Hidden Costs}
But if you stop at salary, you’re already underestimating by 30–50%. Let’s unpack this with a real example.
Example: Hiring a Software Developer at $2,000/Month
- Salary (the obvious part)
- Base pay: $2,000/month
- This is what most founders or HR managers budget for, and where the underestimation begins.
- Benefits & Allowances (the silent add-ons)
- Health coverage: $120
- Internet/data allowance (common in remote Africa setups): $50
- Lunch/transport stipend (even remote staff often get this): $80
- Subtotal = $250/month
Why it matters: Benefits are no longer optional. If you don’t offer them, you lose candidates to employers who do.
- Taxes & Compliance (non-negotiable costs)
- In Nigeria, Kenya, South Africa, etc., employers must cover pension, health insurance, or social contributions.
- Assume 10–15% of salary, about $200–$300/month
.
- Work Tools & Infrastructure (the hidden investment)
- Laptop amortization: $60/month
- Software licenses (Zoom, Notion, GitHub, Slack, etc.): $40–$70
- Internet support (many companies co-pay in Africa to ensure reliable access): $40
- Subtotal = $150/month
- Hidden Costs (the ones everyone forgets)
- Onboarding & training: $200 (spread across first year)
- Lower productivity during first 2 months: $300
- Turnover buffer (replacing someone costs 30–50% of annual salary) → $100–$200/month when averaged
- Subtotal = $600–700/month
Why it matters: A developer who leaves after 6 months may cost you more in replacement and delays than you ever paid them in salary.
Why Businesses Underestimate Employee Cost
- They forget hidden costs. Productivity dips and replacement costs are rarely in the budget, but they happen to everyone.
- They assume compliance is optional. Until a penalty letter arrives.
- They ignore turnover risk. In tech especially, losing one key hire can stall entire projects.
How to Reduce Employee Cost Without Sacrificing Quality
Here are three proven strategies that can save businesses thousands of dollars per employee, without sacrificing talent or output:
1. Outsource & Embrace Remote Hiring
One of the most effective ways to reduce employee costs is by expanding your talent pool globally.
In comparison, hiring a highly skilled developer in Africa through a remote arrangement can cost 30–50% less, while still delivering world-class quality.
Why Africa?
- Competitive Costs: Many African countries have a lower cost of living, which means businesses can pay fair salaries that are affordable compared to Western standards.
- Skilled Workforce: African talent in tech, finance, design, and support roles is growing rapidly, with many professionals trained to international standards.
- Scalability: Businesses can hire full-time staff, contractors, or project-based teams without needing to commit to long-term, high-cost overhead.
2. Use a PEO (like Betternship)
One of the most overlooked drivers of employee cost is compliance and HR administration.
Setting up payroll, handling contracts, managing benefits, and staying compliant with local labor laws can cost companies tens of thousands of dollars annually.
That’s where a PEO (Professional Employer Organization) comes in.
Instead of building an HR/legal infrastructure in every country, companies can partner with a PEO like Betternship. We handle:
- Payroll and compliance in multiple African countries.
- Statutory contributions, benefits, and insurance.
- Employment contracts tailored to local regulations.
- Risk management so businesses avoid fines or penalties.
Example: If you want to hire three remote IT support specialists in Kenya, doing it alone would require setting up a local entity, hiring HR staff, and managing compliance.
That is a costly and time-consuming process. With Betternship, you simply tell us who you want to hire, and we take care of everything legally and administratively.
Result?
You get affordable, compliant, ready-to-work employees without the hidden costs.
3. Invest in Retention
One of the biggest hidden costs businesses ignore is employee turnover.
Research shows that replacing an employee can cost 1.5–2x their annual salary when you add recruitment, training, and lost productivity.
Instead of constantly hiring and rehiring, smart businesses save money by retaining their best employees. Some ways to reduce turnover include:
- Offering competitive pay relative to the market (not always the highest, but fair).
- Providing career development opportunities like training and upskilling.
- Building a positive remote culture through communication, recognition, and flexibility.
- Encouraging work-life balance to avoid burnout.
Conclusion
The true cost of hiring an employee is much more than their paycheck.
Once you add benefits, taxes, compliance, equipment, and hidden costs like turnover, the real expense can be 50–70% higher than salary alone.
But reducing employee cost doesn’t mean lowering standards. By:
- Hiring globally (and tapping into affordable, skilled African talent).
- Partnering with a PEO like Betternship to simplify compliance.
- Investing in employee retention to reduce turnover…
The smartest companies today are not just hiring, they’re hiring strategically.
Are you ready to cut costs without cutting corners?
Partner with Betternship today to access top African professionals affordably, compliantly, and without the overhead of traditional hiring.
[Get started with Betternship today]