Labor cost is the total expense of employing workers on a job, not just their hourly wage, but everything that goes with it: taxes, benefits, insurance, and overhead. Most business owners drasticly underestimate their true labor costs because they only think about wages. If you're paying someone $25/hour, your actual cost is probably closer to $35-40/hour once you add employer taxes, workers comp, and benefits. Knowing this number is essential for profitable pricing.

The formula is: Total Labor Cost = Base Wage + Burden Costs + Allocated Overhead. First, add up hourly wages for all workers on the job. Then add your burden rate (employer taxes, benefits, insurance, typically 20-40% of wages). Finally, add your share of overhead costs per hour. For example: $25 wage + $7.50 burden (30%) + $10 overhead = $42.50 true hourly labor cost. This calculator does all this math automatically.

Burden rate (also called labor burden or employer burden) represents the additional costs employers pay on top of an employee's base wage. It typically includes: payroll taxes (Social Security, Medicare, about 7.65%), unemployment insurance, workers compensation insurance, health insurance, retirement contributions, paid time off, and other benefits. For most businesses, burden rate runs between 20-40% of the base wage.

Burden rates vary based on the benefits you offer: Minimal (10-15%): Just payroll taxes and basic workers comp. Typical (20-30%): Taxes plus health insurance and basic benefits. Comprehensive (30-40%): Full benefits package with retirement matching. Premium (40-50%): Everything plus generous PTO, bonuses, and perks. Most small service businesses fall in the 20-30% range. Don't guess - add up your actual costs to get your real number.

To find your hourly overhead allocation: Add up all monthly overhead costs (rent, utilities, vehicle expenses, insurance, software, marketing, admin wages, equipment, etc.). Divide by total billable hours per month across all employees. For example, if monthly overhead is $8,000 and your team bills 400 hours, overhead allocation is $20/hour. This ensures each job contributes to covering your fixed costs.

Labor cost is what it actually costs you to have workers on a job. Billable rate is what you charge customers. They should never be the same! Your billable rate must cover: labor costs, overhead, AND profit. If your true labor cost is $45/hour and you charge $45/hour, you make zero profit and don't cover overhead. You're actually losing money. Always build in profit margin on top of all costs.

Most profitable service businesses add 15-30% profit margin on top of their total costs (labor + overhead). At minimum, aim for 15%. Anything less and one bad job can wipe out months of profit. A 20-25% margin is healthy and sustainable. Higher-skill trades and specialized services can often command 25-35%. Remember: profit isn't greed, it's what allows your business to survive slow periods, invest in growth, and pay you fairly.

This happens when you forget the hidden costs. Paying a worker $25/hour and charging $35/hour feels like a $10 profit, but it's not. Add $7.50 in burden costs (30%), $8 in overhead, and suddenly you're at $40.50 cost while only charging $35. You're losing $5.50 per hour! This is why calculating true labor cost matters. Most struggling businesses are undercharging because they only consider base wages.

Multiply each component by the number of workers. If you have 2 workers at $25/hour each: base wages = $50/hour. Add burden (30%) = $15/hour. Total labor cost = $65/hour for the crew. Then add overhead allocation (which may stay flat regardless of crew size, or increase slightly). Some businesses simplify by calculating per-worker costs and multiplying, which this calculator supports.

Absolutely yes! If you work on jobs, your time has value. Not including your own labor is the single biggest pricing mistake business owners make. Pay yourself a reasonable wage for the work you do, at least what you'd pay a skilled employee for the same work. If you're an electrician doing $35/hour work, include $35/hour for your time. Otherwise, you're subsidizing every job with free labor.

Indirect labor includes office staff, admins, and managers who support jobs but aren't on-site. These costs are real and must be recovered through your pricing. Calculate their fully-burdened hourly cost, estimate how many support hours each job needs, and include that in overhead. A 2-hour plumbing call might require 30 minutes of scheduling, invoicing, and follow-up. That admin time costs money.

Common forgotten costs include: employer payroll taxes (7.65% minimum), workers compensation insurance (varies by industry, can be 5-15%+), unemployment insurance, paid breaks and downtime, training time, travel between jobs, vehicle wear and costs, tool and equipment depreciation, uniforms and PPE, and phone/communication expenses. Each one individually seems small, but together they add up to 30-50% on top of base wages.

Labor can be both, depending on the type. Direct labor (workers on billable jobs) is typically a variable cost because it increases when you have more work and decreases when business slows down. Indirect labor (office staff, managers, salaried employees) is usually a fixed cost because you pay them regardless of how busy you are. Understanding this distinction helps with budgeting and break-even analysis. Many businesses have a mix of both, with a core fixed team supplemented by variable labor during busy periods.

Target labor cost percentages vary significantly by industry. Restaurants typically aim for 25-35% of revenue. Construction runs 20-40% depending on the trade. Field service businesses (HVAC, plumbing, electrical) target 30-40%. Cleaning services often run 40-55% due to being highly labor-intensive. Retail is typically 15-25%. Manufacturing aims for 20-30%. If your labor cost percentage is significantly higher than these benchmarks, you may be underpricing services, overstaffed, or have efficiency issues to address.

The cost of hiring goes far beyond the first paycheck. Expect to spend $3,000-5,000 or more on the hiring process itself: job postings, background checks, drug tests, and interview time. Then add onboarding costs: training time (yours and theirs), reduced productivity during the learning curve (typically 3-6 months), uniforms, tools, and equipment. For skilled trades, total hiring costs can reach $10,000-15,000 before a new employee becomes fully productive. This is why retention matters so much.

To calculate annual labor cost: Start with base annual wages (hourly rate x 2,080 hours for full-time). Add employer payroll taxes (7.65% for FICA). Add unemployment insurance (1-6% depending on your state and history). Add workers compensation (1-15% depending on job risk). Add health insurance costs (average $6,000-12,000/year for employer portion). Add retirement match if offered (typically 3-6% of wages). Add paid time off value. The total is typically 25-40% higher than base wages alone.

Prime cost is a key metric used especially in restaurants and food service. It combines your two biggest expenses: Cost of Goods Sold (food/beverage costs) plus Total Labor Costs. The formula is: Prime Cost = COGS + Labor. For restaurants, prime cost should typically stay between 55-65% of total revenue. If prime cost exceeds 65%, profitability becomes very difficult. Tracking prime cost helps you balance the trade-off between food quality and labor efficiency.