When hiring their first employees, many business owners make one of the most common mistakes - they plan costs based only on the gross salary.

In reality, the actual cost of an employee to a company is significantly higher.

👉 Gross salary is only part of the total cost, and this mistake can create unexpected financial pressure already in the early stages of a business.

In this article, we will look at:

• how employee costs are formed
• what factors influence the total cost
• and how much an employee costs a company at different salary levels

1. Gross salary and employer social contributions

Gross salary is the amount agreed in the employment contract before taxes are applied.

👉 For example:

• €1,000
• €2,000
• €3,000

However, the company’s costs do not end there.

In addition to the gross salary, the employer must pay mandatory state social insurance contributions.

📊 Social contribution rates in Latvia

In a standard case:

• employer rate: 23.59%

In certain situations, different rates may apply:

• pensioners
• individuals with special status

👉 Therefore, actual costs may vary depending on the employee’s status.

📊Comparison: €1,000, €2,000, €3,000 gross salary

Assuming a standard employer contribution rate of 23.59%:

👉 An employee typically costs a company around 24% more than the gross salary.

2. Variable compensation

In addition to base salary, employees may receive:

• bonuses
• allowances
• performance-based payments

👉 These payments are part of salary and are taxed in the same way as regular wages.

This means:

• they increase the gross salary
• and also increase employer social contributions

📊 Example

If an employee receives a €100 gross bonus:

👉 Even a small bonus increases total costs beyond the paid amount.

3. Other employee-related costs

In addition to salary-related expenses, companies often incur additional costs:

• workplace setup
• equipment and technology
• software and licenses
• training
• health insurance

👉 These costs are not taxed in the same way as salary but significantly increase total employee costs.

4. Business risk state fee

In Latvia, employers must also pay a business risk state fee.

👉 This fee is €0.36 per employee per month.

Although small per employee, it is often overlooked in cost planning.

📊 Example

If a company has:

• 50 employees → €18 per month → €216 per year
• 100 employees → €36 per month → €432 per year

👉 The total impact becomes noticeable over time.

💡 Practical tip

When planning employee costs, it is recommended to increase the gross salary by at least 25% to estimate the total cost.

👉 This helps to quickly understand the budget and avoid unexpected expenses.

📌 Conclusion

The cost of an employee to a company is always higher than the gross salary.

It consists of:

• gross salary
• employer social contributions
• bonuses and additional payments
• business risk fee
• additional expenses

👉 Therefore, when planning employee costs, it is important to consider the total cost, not just the salary stated in the contract.

If you want to understand real employee costs, avoid unexpected expenses, and optimise your payroll structure, contact us - we will help you evaluate and organise your payroll and cost structure professionally and efficiently.