For the sake of occasional business analysis — such as calculating return on investment (ROI) on a project, hiring a new employee, or allocating costs — here’s a simple formula for calculating the hourly cost of an employee:

Cost per hour = annual gross salary/1000

So, the $75,000/year salary costs the company $75 per hour, and the $30,000/year data entry person costs the company $30 per hour.

This quick and practical calculation assumes that overhead costs, including payroll taxes, health insurance, benefits, office space, office equipment, telephone, Internet, electric power, transportation, and so forth, cost the company about as much as the employee’s gross salary.

So the step-by-step calculation, using a $75,000 salary, is:

Double the gross salary ($150,000)
Divide by 50 because a work year includes 50 weeks ($150,000/50 = $3,000)
Divide by 40 because a work week includes 40 hours ($3,000/40 = $75)

I hope that’s helpful.

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Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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How to Calculate the Hourly Cost of an Employee