You’re going to need a few figures to calculate your labor cost. Luckily each calculation is straightforward and can be done easily with our calculator.
Calculate Gross Pay
Gross pay = Pay rate x Gross hours
First, you need to know how many hours your employee works in a given period. To calculate their annual gross pay, multiply the average number of hours worked in a week by the number of weeks in a year. An employee working 20 hours works a total of 1,040 hours annually. If they make $12 an hour, their gross pay looks like this:
$12,480 gross pay = $12 hourly wage x 1,040 work hours
Estimate annual net hours worked
Net hours worked = Gross hours – Hours not worked
Few employees work 52 weeks a year, so you need to factor in time off. If that same employee takes two weeks off each year, at 20 hours a week they’ll have not worked 40 hours . Subtract the unworked hours from the gross hours calculated earlier and you’ll get net hours worked annually.
1,000 net hours = 1,040 gross hours – 40 hours not worked
Calculate additional annual labor costs
Additional annual costs = Taxes + Overtime + Insurance + Benefits + Training
Now is the time to factor in everything else that counts as a labor cost. This will depend entirely on the specifics of your business. Be sure to double check with your bookkeeper or management team to ensure you don’t forget to add any additional costs.
Calculate annual labor costs
Annual labor cost = Gross pay + Additional annual costs
Let’s say the above came out to $3,015 in annual additional costs. All you need to do now is add it to your gross pay to get the annual labor cost for your employee.
$15,495 annual labor cost = $12,480 gross pay + $3,015 additional annual cost
You’ll need to calculate the annual labor cost for each employee and add those together to understand your total annual labor cost.
Calculate actual hourly labor costs
Actual hourly labor cost = Annual labor cost / Net hours worked
The actual hourly rate of employees is an important metric to track. To calculate, divide the annual labor cost of your employee by the number of hours they actually worked.
$15.50 actual hourly cost = $15,495 annual labor cost / 1,000 net hours
Calculate labor cost percentage
Labor cost percentage = Total labor cost / Total revenue
A final important metric is your labor cost percentage. To calculate it, simply divide your total labor cost by total revenue (eke total sales) in a given period. If your total labor cost is for the month of January is $51,650 and your monthly sales are $151,900, the calculation looks like this:
34% = $51,650 total monthly labor cost / $151,900 total monthly revenue