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When California entrepreneurs model their labor costs, they typically start with base salary and stop there — or they add a rough 20% overhead estimate and move on. Both approaches significantly undercount the true cost of a California employee. Here is the complete calculation, line by line, using a concrete example of a $75,000/year employee.
The Base Salary
We start with $75,000 in annual base salary — approximately $36.06 per hour for a full-time employee. This is what most founders put in their financial model. It is roughly 60–65% of the true employer cost.
Payroll Taxes
Federal FICA (Social Security): 6.2% of wages up to the Social Security wage base ($168,600 in 2024) — for our $75,000 employee, $4,650. Federal FICA (Medicare): 1.45% of all wages — $1,088. Federal Unemployment Insurance (FUTA): 6% of the first $7,000 in wages, reduced by state credit to effectively 0.6% — $42. California Unemployment Insurance (UI): Approximately 3.4% of the first $7,000 in wages for new employers — $238. California Employment Training Tax (ETT): 0.1% of the first $7,000 — $7. Total payroll taxes: approximately $6,025 per year, or 8% of base salary.
Workers’ Compensation Insurance
For an office-based employee in a clerical classification, California workers’ compensation rates run approximately $0.50–$1.50 per $100 in payroll — $375–$1,125 per year. For our $75,000 employee in a typical office role, we’ll use $750 as a mid-range estimate. Rates are significantly higher for manual labor classifications.
Health Insurance
California employers with 50 or more full-time equivalent employees are required by the ACA to offer minimum essential coverage or face penalties. Employers with fewer than 50 employees are not required to offer health insurance but often do so to compete for talent. The average employer contribution to employee health insurance in California runs approximately $7,000–$9,000 per year for individual coverage, $15,000–$20,000 for family coverage. We’ll use $8,000 for individual coverage in our calculation.
Mandatory Leave Benefits
California requires paid sick leave of at least 40 hours (5 days) per year. At $75,000 annual salary ($36.06/hour), five days of mandatory paid sick leave costs approximately $1,443 in direct wage cost when the employee is not working but still being paid. Additionally, California’s paid family leave and disability insurance are primarily employee-funded — but administering these programs has a real administrative cost that translates to employer overhead.
The Total
Base salary: $75,000. Payroll taxes: $6,025. Workers’ compensation: $750. Health insurance contribution: $8,000. Mandatory paid sick leave cost: $1,443. Miscellaneous HR, recruiting, and onboarding costs (amortized): $2,500. Total annual employer cost: approximately $93,718 — 25% above base salary. For a company with 10 employees at this compensation level, the annual payroll overhead beyond base salary is approximately $187,000. This is the number that belongs in your financial model, not the base salary alone.
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