How To Calculate Labor Costs

Labor costs are the wages paid to employees during a specific accounting period. This period could be daily, weekly, or monthly. To calculate labor costs, a business owner has to include: wages, taxes, and benefits. As a business owner, you want to make sure that you take everything into account when preparing your financial statements. The largest cost to any business is labor.

First, make sure that you calculate your cost of wages correctly. It is easy to under estimate the cost of labor for the employees that you hire. For example, your starting pay may be $20.00 an hour. After paying taxes, 15% of payroll, your rate is now $23.00 per hour. Your employees may work 40 hours per week, but you have to adjust your financial statements for vacation time, sick time, and holidays. The employees may work 52 weeks during the year at 40 hours per week which will equal 2,080 hours. Also, calculate unproductive hours by employees (i.e. coffee breaks).

Next, make sure that you calculate your taxes correctly. Taxes will vary from state to state so please check with your local tax revenue department. Make sure that you become familiar with: federal, state, medicare, medicaid, and local taxes. Hire a business lawyer to assist you with this process. Taxes can account for 12% to 15% of your payroll and this can be much higher according to which state you live in and the type of business that you are operating.

Then, make sure that you calculate your benefits correctly. Today, insurance is very expensive. Insurance is so expensive that individuals work primarily to have this benefit. Seriously, take in to account, the $23.00 an hour pay and now you have to factor in the costs of health care. It is very difficult to try to say what this benefit will cost. However, we can reasonably say, yet we add $2.00 to the hourly base rate for health insurance. This will take your hourly rate to $25.00 dollars an hour. Now, we can see how the costs of labor are factored in based on wages, taxes, and benefits.

Finally, plan carefully to make sure that you do not lose money as you prepare to embark on your next business venture. Make sure that you consider your wages, taxes, and benefits. This will definitely help you avoid a business failure. Watch your labor costs and you should succeed!


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