How to use the labor cost calculator
- Enter the number of employees, the average hourly wage, the regular hours per week and the paid weeks per year.
- Enter the add-on percents for employer payroll taxes, benefits and workers compensation, and any other cost per employee per year.
- Open the advanced options to add overtime hours and a multiplier, or yearly revenue to see labor as a share of sales.
- Read the total yearly labor cost, the fully loaded cost per employee and per paid hour, and the breakdown table.
Formula
Wages per employee = wage x (regular hours + overtime hours x multiplier) x weeks
Add-ons = wages x (payroll tax % + benefits % + workers comp %) + other cost
Cost per employee = wages + add-ons
Cost per paid hour = cost per employee / ((regular + overtime hours) x weeks)
Percents apply to wages including overtime pay. The result is a planning figure and does not replace your payroll records.
Worked example
Five employees earn $20 an hour for 40 hours a week for 52 weeks, so wages are 20 x 40 x 52 = $41,600 each.
Add-ons of 7.65% payroll tax, 10% benefits and 1% workers compensation are 18.65% of wages, or $7,758.40. Each employee costs $49,358.40, which is $23.73 per paid hour, 1.19 times the wage.
The whole team costs 49,358.40 x 5 = $246,792 a year, or $20,566 a month. Against $1,000,000 of sales that is a labor cost of 24.7%.
Why labor cost is more than wages
What an employee is paid is only part of what they cost. Employers also pay payroll taxes, may provide benefits such as health coverage or a retirement match, carry workers compensation insurance, and spend on equipment and training. Pricing work or planning staffing from wages alone leaves out a large share.
Setting the percents
The percents on this page are examples you can change. The employer share of Social Security and Medicare payroll tax is 7.65% of wages up to certain limits, shown as the default. Unemployment taxes, state taxes, benefits and workers compensation rates differ by state, industry and company. Use the figures from your payroll provider and insurance quotes.
Using the result
The fully loaded cost per paid hour is a useful floor when you price a job or a service, because every hour you sell has to cover it. Compare it with the revenue per employee and with the freelance rate calculator idea of billable hours if staff are not busy all the time. For a sense of time cost in meetings see the meeting cost calculator.
Assumptions and limits
- All employees earn the same average wage and work the same hours.
- The payroll tax, benefit and insurance percents are editable examples and are not official rates.
- Percentages are applied to all wages with no annual wage caps.
- Recruiting, severance and the cost of unfilled shifts are not included.
Frequently asked questions
How do you calculate labor cost per hour?
Add wages and all add-on costs for the year, then divide by the hours paid. The result is the fully loaded cost of an hour of work.
What is a good labor cost percentage?
It varies by industry. Restaurants, retail and professional services run very differently, so compare yours with similar businesses and with your own history rather than a single number.
Does the calculator include overtime?
Yes. Enter average overtime hours per week and the multiplier, such as 1.5 for time and a half. Overtime wages are included in the payroll tax, benefits and insurance percents.
Are owner draws or salaried managers included?
You can include salaried staff by converting their pay to an hourly rate, or run a second calculation for them. Owner draws are not wages and should be handled separately.