Labor Cost Calculator

How Does Labor Cost Calculator Help You?

Our calculator calculates the hourly and total labor cost that includes all the wages and compensations related to an employee’s earnings. With this tool, you can estimate the cost that you have to pay your employees for completing a project or task. This leads to making informed business decisions about the business activities.

How to Calculate Employee Labor Cost?

Steps & formulas to calculate labor cost include:

1) Gross Pay:

Gross hours per year = Gross hours per week × 52

Gross pay = Pay rate × Gross hours

2) Hours Worked:

Net hours worked = Gross hours – Hours not worked

3) Other Expenses:

Other annual costs = Taxes + Insurance + Benefits + Overtime + Supplies

4) Annual Labor Cost Calculation:

Annual labor cost = Gross pay + Other annual costs

5) Hourly Labor Cost:

Hourly labor cost = Annual labor cost / Net hours worked

6) Labor Cost Percentage:

Labor cost percentage = Annual labor cost / Total revenue

Example (Labor Cost Calculation):

Scenario:

A small business has a single employee working 40 hours per week, earning $17 per hour. The employee works 51 weeks per year and has 1 week of paid vacation. The business also pays 10% for taxes, 7% for insurance, and 3% for benefits, and incurs $1,000 in overtime costs and $500 in supplies annually. The business has a total revenue of $120,000 per year.

Calculations:

Gross Hours and Pay:

Gross hours per year = 40 hours/week × 52 weeks = 2,080 hours

Gross pay = $17/hour × 2,080 hours = $35,360

Hours Worked:

Net hours worked = 2,080 hours - 40 hours (1 week vacation)

= 2,040 hours

Other Annual Costs:

Other annual costs = ($31,200 × 10%) + ($31,200 × 7%) + ($31,200 × 3%) + $1,000 + $500

= $3,120 + $2,184 + $936 + $1,000 + $500

= $7,740

Annual Labor Cost:

Annual labor cost = $31,200 + $7,740 = $38,940

Hourly Labor Cost:

Hourly labor cost = $38,940 / 2,040 hours = $19.08/hour

Labor Cost Percentage:

Labor cost percentage = ($38,940 / $120,000) × 100% = 32.45%

Variables that Impact Labor Cost:

Certain factors impacting labor costs include:

Benefits:

Every industry offers various benefits to its labor. Benefits contribute about 30% to the total labor cost. For example, A report published by the US Department of Labor revealed that the average labor cost of an employee working in the private sector was $43.78. Among the costs include Wages at $30.76 per hour worked (70% of the labor cost) plus Benefits at 13% per hour worked (29% of the labor cost).

Using our labor cost calculator helps you to figure out the true cost of labor, as it includes the significant contribution of benefits as per the accurate equations.

Taxes:

Whenever taxes go high, it affects labor costs in many ways, including:

• People avoid working in paid jobs that keep them away from paying huge tax
• They might work more in local stores nearby to their homes
• Some businesses might operate "off the books" to avoid taxes which leads to a bigger underground economy
• Industries that rely on cheap labor might become smaller, as it's more expensive to hire people.

Taxation References: FICA taxes (at 7.65% (Social Security 6.2%, Medicare 1.45%)) & FUTA taxes (6%, but exceptions may apply).

Insurance, Overtime, and Overall Revenue:

These factors significantly affect the labor costs in a company. The labor cost calculator also estimates the more accurate values for employees’ wages based on these factors. 

Insurance directly impacts labor costs. Overtime which is a premium compensation for extra hours worked also impacts the labor cost directly. However, when it comes to overall revenue, it does not directly impact labor costs, as it influences a company's ability to afford higher labor expenses.

Practical Use Cases of Labor Cost Calculator:

Our labor rate calculator serves many practical cases, a few of which include:

Budget and Finance Improvement:

Finance experts can use the labor cost calculator to create more accurate financial budgets. It leads to the effective planning of future expenses and allocate resources accordingly.

Make Informed Hiring Decisions:

By calculating the actual labor costs for additional staff with the tool, companies can make informed decisions about the new hiring.

Increase Profitability:

Using the calculator helps in optimizing the costs, which leads to an effective increase in the overall profit of a business.

Streamline Payroll Processes:

The cost of labor calculator can help you ensure that your payroll calculations are accurate and efficient. By automating certain tasks, you can save time and reduce the risk of errors.

Limitations:

The above calculator calculates results based on the user’s input. It can not cater to the live changes in any of the factors affecting labor cost.