How do I Calculate a Salary?

When calculating what salary to pay an employee, you should use four considerations to guide you: what the position is worth to your company, the industry-standard pay, a candidate's worth in the marketplace, and your personal ethics. Reviewing each of these factors helps you calculate salary and set the optimal wage for any employee.

What Is the Position Worth?

The worth of the position should be your starting point. It’s also the most objective of your four considerations. A human resources director for a large company might be worth a six-figure salary, great benefits and a few perks, based on how much money that position can save a company and how much revenue the position can generate through the correct hires.

However, many small businesses don’t need a sophisticated HR professional because managers are primarily responsible for getting the most out of the few employees the company has.

Work with your management team to determine how valuable a position is to your company, regardless of who you hire. If possible, look at ways this position can help you cut costs, increase revenues, improve operations, and generally contribute to the success of the business. Using this review, you can set the salary for that position.

What Is Industry Standard Pay?

Thanks to job websites that aggregate salaries, you can find out what the marketplace is paying for positions like the one you’re trying to fill. Use websites like, and to search jobs by title and then find average salaries by state and your local area.

If you have a competitor, use a website such as to search the company and see if anyone has posted salary information. Read job descriptions to locate jobs closely aligned to yours and see what companies are paying those employees.

What Is a Particular Candidate Worth?

Jeff Bezos is worth billions to Amazon but not to your business. Just because someone is worth $90,000 in her industry doesn’t mean she can provide enough benefit to your business to justify a $90,000 salary. That’s why determining what a position is worth helps you avoid overpaying attractive candidates who are worth more to other companies.

If you want a high-priced candidate who is on the cusp of your planned salary offer, sweeten the offer with a job title they choose (within reason), flex time, work-from-home option, free parking, and any other perks you can give that won’t break your budget.

What Are Your Ethics?

When you pay employees minimum wage or a meager salary, you might be putting them at or near the poverty level. That means they qualify for public benefits, increasing the burden on taxpayers for food stamps, housing vouchers and free health care. In essence, you’re getting labor subsidized by taxpayers.

If you pay your employees a living wage and your competitors are paying minimum wage, you might not be able to compete and keep your doors open. Take a look at your personal income from the business and decide what you want your business ethics to be when paying your employees.

Calculating a Salary’s True Cost

An employee’s salary is only part of their compensation and cost to you. If you pay Dave $60,000 per year, your total costs are higher than that. You pay FICA taxes, which comes to an extra 7.65 percent as of 2021, according to Thomson Reuters.). In addition, you pay worker’s compensation and unemployment taxes. If you offer benefits, such as health insurance or a 401(k) match, you need to add that to the employee’s compensation.

Once you know the total cost in base salary, taxes and benefits, you can calculate a salary. Dividing by 12, you’ll know what this employee costs you per month. If you pay twice each month or every two weeks, you’ll divide a salary by 24 or 26.

A salary is a predetermined income set for a period of one year, explains AccountingTools. A typical workweek in the U.S. is 40 hours, which comes to 2,080 hours per year. Dividing your employee's base salary by 2,080 hours gives you the hourly (pretax and benefits) cost.