The labor rate formula is the hourly wage plus the hourly cost of taxes for that employee plus the hourly cost of any fringe benefits or expenses. This may be expressed as labor rate (LR) = wage (W) + taxes (T) + benefits (B).
Does an estimate include labor?
What is the formula for direct labor cost?
What should a contractor’s estimate include?
How do you calculate direct labor cost per hour?
How is labor cost variance calculated?
Determine the labor burden
The labor burden is the cost of each employee outside of their hourly wage. Included in calculating the labor burden are the employees’ benefits packages paid by the company. The formula for finding each employee’s labor burden is fairly simple. It uses the employees’ hourly wages, the number of hours they are available to work per year, and the number of days they can be out each year. But, of course, these days are for things like vacation and illnesses.
We’ll use our $20 an hour employee for this example.
The person can work 2,080 hours each year, and they can be out for 15 days due to holidays and the sick/vacation days they are given.
Multiply the 15 days by 8 hours (or whatever a single shift is).
Then subtract the total by the 2,080 hours they’re able to work each year. This will give you the number of hours they are actually working annually.
The formula should look like this: 15×8= 120. 2,080-120= 1,960.
Your records should show you the yearly costs of having an employee. Such as payroll taxes, training, insurance, and other benefits.
Here are numbers we can plug in for this example:
- Payroll taxes- $2,000
- Insurance- $1,000
- Benefits- $2,000
- Supplies and other expenses- $5,000
Add these costs together, and you have a $10,000 labor burden. Next, do the same calculations for each employee on your crew to determine the base rate for the entire team working on the project.
How to Calculate Labor Costs
Accurate labor cost calculation requires more than just examining your employees’ wages. It means calculating every amount that goes into employing your workers. For example, you may be paying a worker $18/hour but he or she may be costing you as much as 60% more than that.
Start calculating labor costs by determining your gross wages paid. Your gross wages include both hourly and overtime earnings. For example, if an employee makes $25 an hour and works 1,920 hours in the fiscal year (with no overtime), their gross income equates to $48,000. Use our time clock conversion table to calculate minutes to decimals.
Field Labor Burden
The next step is to determine your field labor burden. Field labor burden is the additional amounts on an employee’s paycheck above their hourly wages such as taxes, worker’s compensation, and vacation pay. Calculating the field labor burden requires adding these extra expenses.
Note: field labor burden is only applicable when it pertains to all employees. If it’s a unique instance that only affects a singular employee, it should not be included in your field labor burden calculation.
Benefits are another area that figures into your total labor costs. This is an important step as benefits contribute to a large chunk of your labor costs. According to the Bureau of Labor Statistics, the average cost of employee compensation for civilian workers is $38.20 per hour. Wages account for $26.17, while benefits make up the difference:$12.04 per hour or more than 30%.
Standard benefits include:
- Health/medical, dental, vision, life, and disability
- Paid time off and vacation days
- Retirement plan assistance, such as matching 401(k) contributions
- Supplemental pay and bonuses
- Equipment and Supplies
For some industries, there also might be significant onboarding costs to get new employees ready to start work on day one. Your new employees also might require:
- Protective gear
- Cell phones
Don’t forget to consider ongoing training costs for employees. For example, certain workers might require certifications and yearly training to retain licensing and run machines and other types of equipment.
Lastly, taxes need to be factored into your total labor costs. The tax withholding list below covers the basic taxes most employers pay. However, there may be additional tax considerations that you’ll have to include.
Note: when calculating tax withholdings, be sure to do so with an accountant for an accurate calculation.
- Social Security – 6.2% (not to exceed $127,200 in total)
- Medicare – 1.45%
- Federal Unemployment Tax Act (FUTA) – 6.0% (of a maximum $6,000)
- State Unemployment Tax – This figure varies by state