A Complete Guide to Total Payroll Cost (Beyond Minimum Wage)

For founders planning to scale or remote companies hiring nationwide, a state-by-state minimum wage list is often the first stop. With about 20 states still using the federal minimum of $7.25 per hour, it can feel like a solid starting point.

But treating that rate as the full ‘price tag’ of an employee is misleading. Wages are just one piece of a larger puzzle that includes taxes, benefits, and other hidden costs. Relying solely on minimum wage figures can create false savings now and costly challenges later.

In this article, we dismantle the ‘best minimum wage myth’ by showing why total payroll cost is the true metric for success. Also, learn how a strategic approach to compensation can actually save you money while building a stronger team.

Breaking Down the Real Cost Behind Every Paycheck

Understand what an employee truly costs. The hourly rate is just the beginning. The total cost includes several other layers that vary from one location to another.

• Mandatory payroll taxes

Every employee comes with federal taxes like FICA (Social Security and Medicare) and FUTA (federal unemployment). But the real variable is State Unemployment Insurance (SUI), which has different tax rates and wage bases for every state. A low-wage state could have a higher SUI tax burden that narrows the cost gap.

• Benefits

Health insurance, retirement contributions, and paid leave are a part of the equation. In March 2025, wages and salaries averaged 61.6% of employer costs, while benefit costs averaged $24.58 and accounted for the remaining 38.4%, according to the U.S. Department of Labor. 

• Other essential costs

Don't forget workers' compensation premiums, which are directly tied to the payroll and vary dramatically by state and job function.

When you add these up, the actual cost of an employee can be 40-50% higher than their sticker pay rate. As a result, the difference between the highest minimum wage state and the lowest is much less significant than it appears.

Hidden Costs of Chasing the Federal Minimum

Focusing on hiring in states with a federal minimum wage can be more expensive in the long run. This is because paying the bare minimum frequently leads to significant hidden costs that drain your resources. 

The biggest hidden cost is employee turnover. According to a Gallup study, the cost of replacing an individual employee can range from one-half to two times the employee's annual salary. Low wages are a primary driver of this turnover. 

Research from Harvard Business Review has shown that even a modest pay increase for low-wage workers can lead to a significant return on investment through improved retention and reduced hiring costs.

Furthermore, there's a difference between a minimum wage and a living wage. For example, in Harris County, Texas, which adheres to the $7.25 federal minimum, the calculated living wage for a single adult with no children is over $20.00 per hour, according to the MIT Living Wage Calculator.

An employee earning less than a living wage is more likely to be stressed, less engaged, and less productive, which directly impacts your bottom line.

How Thinking In Total Payroll Cost Wins

Instead of asking, “What is the lowest I can legally pay?” ask, “What is the optimal investment I can make in an employee to get the best return?”

This shifts your mindset from cost-minimization to strategic investment. The message is clear: pay a competitive wage that is closer to the living wage, even if it's well above the state minimum wage. 

This strategic view also applies to your benefits. A well-designed benefits package can be more valuable to an employee than a slight wage increase, but it can be structured to manage costs. The goal is to build the best possible total rewards package for your budget.

Manage Your Employee Costs Prudently With Experts 

Calculating the total payroll cost across different states requires deep knowledge of the current minimum wage by state, from the state minimum wages to the rules in states with no minimum wage. You also need a clear understanding of the associated tax and compliance burdens. As a founder, this exercise may divert your attention from your core business practices. 

DianaHR professionals, by taking over these tasks from you, help you manage employee costs in a financially prudent way. They keep track of multi-state HR compliance, benchmark competitive wages using real-time data, and design benefits packages that attract and retain top talent.

Reduce employee costs and boost work satisfaction with DianaHR. Chat with HR experts today. 

FAQs

1. What is the difference between minimum wage and a living wage? 

The minimum wage is the legally mandated lowest hourly pay rate that employers must offer, which can be set at the federal, state, or city level. A living wage, by contrast, is not a legal requirement but a calculation of the actual hourly rate a person must earn to cover their basic needs (like food, housing, and healthcare) in a specific geographic area.

As shown by tools like the MIT Living Wage Calculator, the living wage is often significantly higher than the minimum wage, highlighting the financial challenges faced by low-wage workers.

2. Does paying more than the minimum wage save money? 

Paying a competitive wage that is higher than the state minimum can save money in the long run. Numerous studies, including data from Gallup, indicate that higher wages are strongly linked to lower employee turnover, which is a significant expense for businesses.

A higher wage also leads to increased employee productivity, engagement, and morale. This reduces the hidden costs associated with constant hiring, training, and lost productivity.

3. How do payroll taxes affect the total cost of an employee in different states? 

Payroll taxes can affect the total cost of an employee, and these costs vary by state. While federal taxes like FICA (Social Security and Medicare) are the same everywhere, state-level taxes, primarily State Unemployment Insurance (SUI), have different rates and wage bases.

A state with a low minimum wage might have a higher SUI tax rate or apply that tax to a larger portion of an employee's wages. This is why you must look beyond the hourly wage to the total payroll tax burden to understand the actual cost of an employee.