What counts as labor cost
Labor cost is the total you spend to have people working for you. The U.S. Bureau of Labor Statistics splits employer costs into two parts: wages and salaries, and benefits. For most owners, that means:
- Wages for hours worked, including overtime, shift premiums and non-discretionary bonuses.
- Paid leave, such as vacation, holidays and sick time.
- Benefits you pay for, such as health insurance and retirement contributions.
- Legally required employer costs, which BLS groups as Social Security, Medicare, unemployment insurance and workers’ compensation. This guide doesn’t cover how to figure those amounts; your accountant or payroll provider can.
- Other people costs you choose to include, such as uniforms, training and recruiting.
The basic labor cost formula
For any period, add it up:
- Total wages for hours worked, including overtime.
- Plus paid leave.
- Plus benefits and other employer-paid costs.
- The total is your labor cost for that period.
Use the same period every time, such as a pay period, a month or a year, so your numbers line up.
How to calculate fully loaded hourly labor cost
The fully loaded hourly cost shows what one hour of an employee’s work really costs you, not just their pay rate:
Fully loaded hourly cost = total labor cost for the employee ÷ hours actually worked
Use hours actually worked, not hours paid. Paid holidays and sick days add cost without adding hours on the job, so they raise the true cost of each hour worked. This is the number to use when you quote a job or set a crew size.
How to calculate labor cost percentage
Labor cost percentage shows how much of your sales goes to labor:
Labor cost percentage = (total labor cost ÷ total sales) × 100
Example: if labor cost for the month is 30,000 and sales for the same month are 100,000, the labor cost percentage is 30,000 ÷ 100,000 × 100 = 30 percent. There’s no single right number. It varies a lot by industry and by business, so the most useful comparison is your own trend from month to month.
Labor cost for restaurants and job sites
- Restaurants often track labor alongside food and drink costs, and watch labor by shift or day part. Scheduling to expected sales is the main lever. See payroll and time clock for restaurants.
- Construction and field crews usually track labor by job, so each estimate can be checked against what the job actually took. See our guide to construction time cards.
Common labor cost mistakes
- Using the wage alone. Leaving out benefits and paid leave understates what each hour costs.
- Missing overtime. Overtime is at least time and a half under federal law, so it moves labor cost fast. See how overtime is calculated.
- Bad hours data. Missed punches and buddy punching make every formula above wrong before you start.
- Not counting all hours worked. Under federal law, time an employee is allowed to work, even if you didn’t ask for it, is work time you pay for.
How PunchOutPayroll helps
Every labor cost number starts with hours. PunchOutPayroll shows each person’s week with overtime and breaks, PTO and sick time accrue from hours worked, and approved hours export in a payroll-ready file. You run payroll. See payroll for owner-run businesses, browse all features, or start a 14-day trial.