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What is a typical cost for an IT company in California to hire employee with 300K/year base salary? The company offers full health insurance coverage and 401K matching, but these are variable. To make it simple, assume there are no benefits, What kind of taxes (if any) would the company need to pay so that the employee gets 300K base pay, and what’s the approximate total that the company actually pays?

In case if the same company hires a contractor with 300K/year pay, as I understand, company pays exactly 300K/year and doesn't need to pay any extra employer paid taxes/contributions.

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The rule-of-thumb is that if your company is going to contract your services to another company they have to charge 2x what the employee sees as their gross pay. That pays for salary, benefits including holidays and vacation, and their portion of FICA. There is also the cost of 401(k) matching. There are also other things such as payroll taxes charged by the state government. That also includes the costs to mange you, and for their staff to handle the payroll and accounting. It also covers their profit.

So if you want the employee to make $300,000 a year the employee thinks of that as about $150 per hour. So your employer has to charge $300 per hour.

Of course this doesn't include other expenses such as equipment and office space because that depends on where you are working and what you need to do your job.

I have also seen estimates that a person who doesn't need most benefits because they are retired and have another source for insurance, can get away with only charging 30-40% above their pay rate to cover all their required expenses plus have time off for holidays and vacations. That requires them to charge $150*1.4 or $210 per hour for each billable hour which will be less then 2080 hours to compensate for time off.

What you are asking is what does it cost as a minimum if there are no non-required expenses. That would be salary, the company portion of FICA and the state payroll taxes.

The company portion of FICA is 6.2% of the 2020 wage base of $137,700 in 2020 so a maximum of $8,537.4. The Medicare tax is 1.45% of all wages or $4,350 in your case.

California payroll taxes cover several categories:

UI is paid by the employer. Tax-rated employers pay a percentage on the first $7,000 in wages paid to each employee in a calendar year. The UI rate schedule and amount of taxable wages are determined annually. New employers pay 3.4 percent (.034) for a period of two to three years. The EDD notifies employers of their new rate each December. The maximum tax is $434 per employee per year (calculated at the highest UI tax rate of 6.2 percent x $7,000.)

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The ETT is an employer-paid tax. Employers subject to ETT pay 0.1 percent (.001) on the first $7,000 in wages paid to each employee in a calendar year. The tax rate is set at 0.1 percent (.001) of UI taxable wages for the employers with positive UI reserve account balances and employers subject to section 977(c) of the California Unemployment Insurance Code. The maximum tax is $7 per employee, per year ($7,000 x .001).

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The 2020 SDI tax rate is 1.00 percent (.010) of SDI taxable wages per employee, per year. SDI and PFL are set by the California State Legislature and may change yearly. The maximum tax is $1,229.09 per employee, per year ($122,909 x .010).

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  • your employer has to charge $300 per hour - what does it mean? the employer in question doesn't charge anybody. When I tried to google I estimated that 10-20% extra on top of base is what a typical employer pays, is that correct? I also updated the question to compare total pay if hiring a contractor. – Pavel P May 25 at 7:03
  • In the previous paragraph I specify the situation where you are being contracted out, and explain why it is 2x. but then work that number down because you asked for zero benefits. – mhoran_psprep May 26 at 13:01

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