How Is Labor Cost Calculated?

Labor cost is calculated by adding the cost of employee wages, factoring in direct and indirect expenses, and dividing that by the total hours worked.

Understanding labor costs and how they affect your business is crucial for the profitability and management of an organization. 

Step one is to determine employee wages. Begin by adding up the total wages earned by each employee. Include hourly wages, salaries, commissions, and bonuses. Make sure to account for overtime pay, which is typically 1.5 times the regular hourly rate.

Next, calculate payroll taxes. Employers are responsible for paying Social Security, Medicare, and other payroll taxes. To calculate these taxes, multiply the employee’s gross wages by the tax rate. Be sure to stay up-to-date on current tax rates to ensure accurate calculations.

Make sure to factor in employee benefits. Benefits are an essential part of your labor costs. These include health insurance, retirement plans, paid time off, and other perks. Calculate the cost of each benefit per employee and add this to your total labor expenses.

Consider training and development of employees. Investing in employee training and development is a great perk and can lead to further business success. 

Once that is complete, calculate overhead costs. Overhead costs are the indirect expenses for the organization, such as office space, utilities, and equipment. To allocate these costs, divide your total overhead expenses by the number of employees. This will give you an overhead cost per employee, which you can add to your labor cost calculation.

Finally, figure out the total labor cost. Add wages, payroll taxes, benefits, training, and overhead amounts for each employee. The final number will be the total labor cost for the organization.

Labor calculation is an ongoing process that must be periodically reviewed and updated to account for changes in employee compensation, benefits, and work hours. By staying informed and proactive in your labor cost management, you’ll be better equipped to price services and steer your business toward long-term success.


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