How to Calculate Labor Rates

Calculate your true hourly cost and determine the profitable selling price.

The raw hourly amount paid to the employee.

Taxes, insurance, benefits (usually 15-30%).

Rent, utilities, admin costs allocated per hour.

The percentage of profit desired on the final price.

How to Calculate Labor Rates Correctly

One of the most common mistakes service-based businesses make is confusing an employee's hourly wage with the cost of labor. If you charge a client \$30/hour because you pay your employee \$25/hour, you are likely losing money on every hour worked. To ensure profitability, you must calculate the Loaded Labor Rate and factor in overhead before setting your profit margin.

1. The Base Wage vs. The Loaded Labor Rate

The calculation starts with the Base Hourly Wage, which is the amount showing up on the employee's paycheck. However, the business pays more than this. You must add the Labor Burden.

Labor Burden includes:

• Payroll Taxes (Social Security, Medicare)
• Unemployment Insurance (FUTA/SUTA)
• Workers' Compensation Insurance
• Health Benefits and Retirement Contributions
• Paid Time Off (Vacation/Sick days)

Typically, labor burden ranges from 15% to 30% of the base wage, or higher if extensive benefits are provided.

2. Allocating Overhead

Even after covering the employee's direct costs, your rate must cover the business's operating expenses, known as Overhead. These are costs that exist whether you land a job or not, such as:

• Office Rent and Utilities
• Administrative Salaries (Bookkeepers, Receptionists)
• Software Subscriptions and Insurance
• Marketing and Advertising

To use this calculator, you determine an "Overhead Rate per Hour" by dividing your total annual overhead expenses by the total billable hours your team works in a year.

3. Break-Even vs. Billable Rate

The sum of the Loaded Labor Cost and the Overhead Rate gives you your Break-Even Rate. If you charge this amount, the business makes \$0 profit. To grow, you must add a Profit Margin.

Note that this calculator uses a Margin calculation (Selling Price = Cost / (1 – Margin %)), which is different from a simple Markup. A 20% margin ensures that 20 cents of every dollar earned is pure profit.

Formula Used

The mathematical logic used in the tool above follows this sequence:

1. Burden Cost = Base Wage × (Burden % ÷ 100)
2. Loaded Cost = Base Wage + Burden Cost
3. Break-Even = Loaded Cost + Overhead Rate
4. Final Rate = Break-Even ÷ (1 – (Margin % ÷ 100))