You can afford to hire an employee when three lines in your books say yes. The first is the fully loaded cost: wages plus roughly 30 percent for employer taxes, insurance and benefits, which is the split the Bureau of Labor Statistics reports for private industry. The second is cash: after paying that cost through the three to six months before the hire pays for themselves, you still hold at least a month of operating expenses. The third is the revenue the hire has to add, which is the loaded cost divided by your gross margin percentage. If all three hold, hire. If only the first does, wait.
What an employee actually costs
The calculators all do the same thing: take a wage, add a percentage. The percentage is the part worth understanding.
Fully loaded cost is the wage plus everything the employer pays because of that wage: the employer share of Social Security and Medicare, federal and state unemployment tax, workers' compensation insurance, health insurance if you offer it, retirement matching, paid leave, and the payroll service that processes it all.
The Bureau of Labor Statistics measured that stack for December 2025, in figures released on 20 March 2026. In private industry, total compensation averaged $46.15 an hour, of which wages were $32.36, or 70.1 percent, and benefits $13.79, or 29.9 percent. Legally required benefits alone were 7.2 percent: Social Security, Medicare, unemployment insurance and workers' comp. Health insurance was 7.1 percent, paid leave 7.6 percent, retirement 3.4 percent. Bench's 2018 advice to "budget an extra 30 percent" came from the same survey when the split was 68.3 to 31.7, so the rule has held.
Suppose a 29-person electrical contractor hires a service technician at $58,000. The employer's share of Social Security and Medicare is 7.65 percent, or $4,437. Federal and state unemployment tax on the first slice of wages comes to about $610. Workers' comp for a technician in the trades runs about $2,320. The employer's share of health insurance is $600 a month, $7,200 a year, and a 3 percent retirement match is $1,740. Add roughly $1,100 for the payroll service, a phone and the software seat, and the technician costs $75,400 a year, or $6,283 a month. Without health insurance and the match it is about $66,500. A $22-an-hour office hire is $45,760 in wages and about $59,500 loaded.
Note what that figure leaves out: the truck, the tools, and the weeks before the person is billing.
Line one: gross profit per head
Gross profit per head is gross profit for the year divided by the number of people on payroll. It comes straight off the P&L, which is worth reading the right way first.
The electrical contractor had revenue of $4,318,000 last year at a 36 percent gross margin, so gross profit of $1,554,500 across 29 people, or $53,600 per head. The new technician costs $75,400 loaded. On day one, the company has 30 people and the same gross profit, so the figure drops to $51,800, and it stays down until the hire produces more than $75,400 of gross profit a year on their own. A technician who bills can get there. For an office hire, it is not, unless the hire frees someone else to bill more, and that has to be a specific person and a specific number of hours, not a hope.
If you own more than one company, run this per company. The average across three files hides the one where gross profit per head is already below the loaded cost of the person you are about to add.
Line two: cash after the ramp
A hire costs the full loaded amount from the first payday and earns nothing for the business until they are trained, billing and collected. Three months is a short ramp; six is normal for anyone who has to learn your customers.
The arithmetic is the loaded monthly cost times the ramp months, subtracted from today's balance. The contractor holds $212,400 in the operating account. Four months of the technician is $25,100, leaving $187,300. Monthly operating expenses, meaning everything that goes out in a normal month including the existing payroll, are $164,900. So after the ramp the company still holds a little over one month. That line passes.
The reason the test is one month is that most businesses do not have it. A 2016 JPMorgan Chase Institute study of 597,000 small firms found the median held 27 days of cash and a quarter held under 13. Bluevine's October 2025 survey of 774 owners found 39 percent had less than one month of operating expenses on hand, and 51.3 percent would tap reserves within 48 hours to make payroll. Hiring from 27 days of cash means the first slow month decides whether you keep the person. Counting your reserve in days is the way to see where you sit before signing anything.
Line three: the revenue the hire has to add
The loaded cost has to be earned back at your margin, not at your revenue. Divide the loaded cost by the gross margin percentage: $75,400 at 36 percent is $209,400 of revenue a year, about $17,500 a month, that the business has to do because this person is here and would not otherwise have done.
Either the hire brings in new work, which for a technician means jobs being turned away today; count them from last quarter's declined estimates. Or the hire replaces money already going out the door. If the contractor paid $214,000 to subcontractors last year and the new technician can absorb $32,400 of that, then $32,400 of cost comes out, which is $32,400 of gross profit, and the hire only needs $119,400 of new revenue to cover the rest. Either way, write the number down. It is the one you will check in six months.
| Line | Figure | Where it comes from |
|---|---|---|
| Loaded cost of the hire | $75,400 a year, $6,283 a month | Wage plus employer taxes, insurance, benefits |
| Cash after a four-month ramp | $187,300 against $164,900 of monthly outgoings | Bank balance less ramp cost |
| Revenue the hire must add | $209,400 a year at 36 percent gross margin | Loaded cost divided by gross margin |
The two costs the calculators leave out
The first is getting the person in the door. SHRM's 2016 benchmarking report put the average cost per hire at $4,129, a figure that is a decade old and covers larger employers, so treat it as an order of magnitude rather than a budget.
The second is the ramp itself, which is line two above but easy to underestimate. A technician who joins on 1 May, trains for six weeks and bills from mid-June has their first invoices collected in late July. Three months of cost, no cash back. Owners who forecast this on a 13-week cash flow see the low week before they sign the offer letter; owners who do not tend to meet it in week nine.
Navigator Pro carries a 13-week cash forecast and a rolling 12-month forecast built from each QuickBooks Online file, and an owner can add the loaded cost of a hire from a start date and see which week the balance dips lowest, per company. Gross margin per company is on the base plan. Plans and prices are on the pricing page.
When the hire will work for two of your companies
The owner with an electrical company and an HVAC company bought two years ago usually wants one dispatcher for both.
One company runs the payroll. If the other company uses half the dispatcher's time and pays nothing, the first company carries $59,500 of cost it did not fully incur and the second gets free labor, so the first looks less profitable than it is and the second more. Both P&Ls are wrong by the same amount in opposite directions, which is why the total looks fine and the decisions made from it are not. The fix is an intercompany charge, posted monthly by the bookkeeper, for the agreed share, and intercompany transactions explained covers how that entry looks in both files. Agreeing to "sort it out at year end" means the split is decided by whoever prepares the tax return, months after it mattered.
When you cannot afford to hire an employee yet
Common advice says to hire when you are overwhelmed. We would not, because overwhelmed is a scheduling signal and the three lines are a financial one, and they disagree more often than they agree. An owner working seventy-hour weeks with 27 days of cash should raise prices before hiring, because a price rise adds to gross margin with no ramp and no payroll.
If line one passes and line two does not, a contractor for the next quarter buys time without the 30 percent or the severance. If line three is the problem, a part-timer at 20 hours costs less than half of the full-time figure and tests whether the work is really there. And if all three fail, the business cannot carry the person, whatever the calendar says.
The three lines cannot tell you whether the individual will be any good, whether the work you are turning away will still be there in October, or whether your gross margin will hold when you have one more person to keep busy. They tell you what the business can afford today. Everything after that is a judgment.
Questions owners ask
How much does an employee really cost on top of salary?
About 30 percent more, for most private employers. The Bureau of Labor Statistics' December 2025 figures put wages at 70.1 percent of total compensation and benefits at 29.9 percent, of which legally required items such as Social Security, Medicare, unemployment and workers' comp are 7.2 percent and health insurance 7.1 percent. A business offering no health plan sits nearer 15 percent; a trade with high workers' comp rates sits higher.
How much revenue should an employee generate?
Enough gross profit to cover their loaded cost, at your margin. Divide the loaded cost by your gross margin percentage: $75,400 at 36 percent is about $209,400 of new revenue a year. The same result comes from replacing subcontractor spend with the hire's hours, so count revenue the hire frees up as well as revenue they bring in.
Should I hire an employee or a contractor first?
A contractor when the work is lumpy or you are not sure it will last, because you can stop without severance and there is no employer tax. An employee when the work is steady, you need control over how and when it is done, and the IRS tests would call them one anyway. Misclassifying to save the 30 percent is a poor trade.
How much cash should I have before hiring?
After paying the hire through the months before they cover themselves, you should still hold at least one month of operating expenses. A 2016 JPMorgan Chase Institute study of 597,000 firms put the median small business at 27 days of cash, and a Bluevine survey in October 2025 found 39 percent held under a month. Hiring from that position means one slow month decides it.
Can one employee work for two of my companies?
Yes, but one company must run their payroll and the other must pay for the share of time it uses, through an intercompany charge booked in both files. Leaving it informal puts the whole cost in one P&L and free labor in the other, so neither company's margin is true. Agree the split up front and have the bookkeeper post it monthly.
Related
The cash line depends on a forecast you can build in an hour, which is what cash flow forecast for a small business walks through. Whether your gross margin is good enough to carry a hire at all is answered by trade in what is a good profit margin for a small business. And if the reserve is the line that fails, how much cash reserve a business should have gives the target in days.
To see the three lines for each of your companies from the books you already keep, the trial connects to QuickBooks Online read-only in about fifteen minutes with no card: navigatorhq.ai.
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Published . Last updated . Reviewed by a CFO on the Navigator team.