Know what your staff really costs so you can plan schedules and prices.
Some businesses track only wages for a quick view and add the rest for a full view.
To record clock-ins, breaks and overtime automatically, see EZTime time and attendance software.
Labor cost = wages + related costs for the period.
Labor cost percentage = labor cost ÷ sales × 100.
A cafe has $4,800 in wages for the week, plus $600 in related costs. Weekly sales are $18,000.
| Item | Amount |
|---|---|
| Wages | $4,800 |
| Related costs | $600 |
| Total labor cost | $5,400 |
| Labor cost percentage | 30% |
Cutting hours too hard can hurt service and sales, so use labor cost together with quality measures. Also remember that the right percentage differs by industry.
Direct labor is the cost of people who produce what you sell, such as cooks or technicians. Indirect labor covers support roles, such as admin or cleaning. Separating them helps you see how much of the payroll is tied to output.
The cost of an hour of work is higher than the hourly wage, because it includes taxes, benefits and paid leave. A simple way is to divide total labor cost for a period by total hours worked. This gives a real cost per hour for planning prices and quotes.
| Item | Per month |
|---|---|
| Wages | $3,200 |
| Employer taxes and benefits | $640 |
| Total cost | $3,840 |
| Hours worked | 160 |
| Cost per hour | $24.00 |
The best labor plans follow demand. Look at sales by hour, then set minimum staffing for the quiet hours and add people for peaks. Review last month’s plan against what happened, and adjust your assumptions.
| Item | Amount |
|---|---|
| Wages | $3,900 |
| Payroll taxes and benefits (estimate) | $600 |
| Total labor cost | $4,500 |
| Sales | $15,000 |
| Labor cost percentage | 30% |
Comparing 30 percent with the previous four weeks tells you much more than the number alone. If last month was 27 percent, find out what changed: more hours, lower sales or both.
The goal is not to cut hours blindly. It is to match staffing to demand so that service stays good while waste goes down.
Pick one day, such as Monday, to calculate last week’s labor cost and percentage. Record it in a simple sheet and look at the trend. A time and attendance tool that exports actual hours makes this a five-minute job instead of an hour of adding.
“Related costs” above starts with taxes that every US employer pays on wages. The federal ones are set by law; state ones vary.
| Cost | Who sets it | How it is calculated |
|---|---|---|
| Social Security | IRS (FICA) | 6.2% of wages up to the annual wage base |
| Medicare | IRS (FICA) | 1.45% of all wages |
| Federal unemployment (FUTA) | IRS | 6.0% on the first $7,000 per employee, usually reduced to 0.6% by the state credit |
| State unemployment (SUTA) | Your state | A rate assigned to your business on a state wage base |
| Workers’ compensation insurance | State rules and your insurer | A rate per $100 of payroll by job class |
FICA alone adds 7.65 percent to most wages, which is why a $20.00 hourly wage costs the business at least $21.53 before insurance and benefits.
A fictional full-time employee earns $20.00 an hour, works 2,000 hours in a year and receives 80 hours of paid time off:
| Item | Amount |
|---|---|
| Wages: 2,080 paid hours x $20.00 | $41,600.00 |
| Social Security and Medicare (7.65%) | $3,182.40 |
| FUTA after state credit | $42.00 |
| State unemployment (fictional 2.7% on a $9,000 wage base) | $243.00 |
| Workers’ comp (fictional $1.10 per $100 of payroll) | $457.60 |
| Employer share of health insurance (fictional) | $5,400.00 |
| Total annual cost | $50,925.00 |
| Cost per hour actually worked (2,000 hours) | $25.46 |
The employee is paid $20.00 an hour, but each hour of work costs the business $25.46. That 27 percent gap is what should go into prices, quotes and staffing decisions. Paid time off adds cost without adding worked hours, which is why the divisor is hours worked, not hours paid.
| Mistake | Effect | Fix |
|---|---|---|
| Using scheduled hours | Misses late clock-outs and unplanned overtime | Use approved hours from your time records |
| Leaving out the overtime premium | Understates cost in busy weeks | Include the extra half-time in wages |
| Ignoring salaried managers | Labor percentage looks low at small sites | Add a weekly share of salaries |
| Comparing with gross sales including tax | Labor percentage looks lower than it is | Use net sales before tax |
EZTime shows real-time labor costing while you build the schedule and records actual hours from the clock, so the scheduled and actual figures can be compared each week.
It depends on your industry and model. Compare with your own history and similar businesses.
It depends on how they are paid and your accounting method.
Weekly works for many shift-based teams.
At least 7.65 percent for Social Security and Medicare, plus federal and state unemployment and workers’ compensation. The total depends on your state, industry and claims history.
Because paid time off and holidays cost money without producing work. Dividing by hours worked gives the true cost of an hour of output, which is what you need for quotes and staffing.
For a full picture, yes. Add each salary for the period, plus taxes and benefits. Some businesses track hourly labor and total labor separately.
See how EZTime records start, stop and breaks so your reports are ready for payroll.