Free Labor Cost Calculator

Labor costs are any fixed or variable expenses related to hiring, training, and compensating employees. They’re an important variable when you’re calculating service costs. 

Labor costs can include:

• Payroll
• Overtime
• Health care and benefits
• Bonuses
• Vacation and sick days
• Training days
• Insurance
• Meals
• Supplies

You can group labor costs by direct costs and indirect costs. Direct labor costs are tied to the job at hand—for example, payroll, social security, and benefits for employees working on that specific project. Indirect labor costs are for people who aren’t associated with any one job but are still essential for its success, like your office staff and other support workers.

Here’s how to calculate labor costs with a simple formula:

Hourly salary + Direct costs + Indirect costs + Profit amount

You can use our free cost of labor calculator to determine hourly, project, and even annual labor costs. Here’s what to plug in for each of those variables:

• Salary is the combined hourly wages for all employees assigned to the job.
• Direct costs are non-salary labor costs for the job’s workers (e.g., payroll, security, benefits).
• Indirect hourly costs are labor costs for support employees (salary and direct costs for office and admin staff).
• Profit amount is the net amount your business gets to keep after costs and expenses.

Our labor cost calculator is just one of our free tools that help you estimate, invoice, and get paid for your work. This calculator is an important part of your project pricing strategy. Bookmark this page and use it for free whenever you’re pricing labor costs.

Add up your hourly salary, direct costs, indirect costs, and desired profit amount. Your actual numbers for these variables could look something like this:

• You have two employees, both making $15/hour. Combine these wages, and your employees’ hourly salary is $30.
• Payroll and benefits for these two employees cost you roughly $4/hour each, putting your direct costs at $8/hour.
• Every job requires your supervision and support (quoting, scheduling, invoicing, etc.) at a rate of $18/hour. Adding an extra $4 for your payroll and benefits, your indirect costs are $22/hour.
• You operate with a 15% profit margin. Factoring that in, you know your desired profit amount per hour is $9.

Total it up, and you can see that your total hourly labor costs are $69. This is just one example of how to calculate hourly labor costs.

Determine the hourly salary, direct costs, and indirect costs for every employee who will be working on the project, as well as your desired hourly profit amount. Then multiply each variable by the number of hours that each person will be working.

Building on our hourly labor cost example above, you know that:

• Your hourly salary is a combined $30/hour for the two workers who will complete the job. You estimate the job will take two employees and five hours to complete, for a total of 10 labor hours. This means your project salary will be $300.
• You’re paying a combined $8/hour in direct costs (payroll and benefits) for these workers. Multiplied by 10 labor hours, you’ll pay $80 for the project’s direct costs.
• You’ll provide supervision and support at $22/hour in indirect costs, including your own payroll and benefits. Your role in the project (client care, team check-ins, and invoicing) will only take an hour, so your project’s indirect costs are $22.
• Sticking with your 15% profit margin, you tally up your project’s salary, direct costs, and indirect costs, then multiply that subtotal by 0.15. This gives you a project profit of $60.

Add it all up, and you need to charge $462 in labor costs for this project.

(Want to factor in materials and overhead for a complete estimate? Try our free service price calculator.)

You can calculate annual labor costs per employee or for your entire team. Just add up your hourly salary, direct hourly costs, indirect hourly costs, and profit amount, then multiply by the number of working hours in a year.

Here’s an example of how to calculate annual labor costs for a single worker (see the hourly and project labor sections for more detail):

• One of your employees earns an hourly salary of $15. They work 40 hours a week, which comes to roughly 2,000 hours per year (including holidays and sick days). This means their annual salary is $30,000.
• Payroll and benefits for this employee cost a combined $4/hour, making your direct costs for this employee $8,000/year.
• Your indirect costs are $22/hour, or $44,000/year. As the business owner, you spend 25% of your time supervising this employee, handling their payroll, and quoting and invoicing their projects. This means annual indirect costs for this employee are $11,000.

In total, your employee costs your business $49,000 per year. Factoring in your 15% profit margin, you need to earn at least $56,350 in sales to justify keeping this worker—and to stay profitable.

To calculate annual labor costs for your entire team, just go through this process for each employee and add up your totals. You can also adapt this formula to calculate weekly or monthly labor costs.

Labor cost percentage is the amount of a business’s revenue that goes toward workers’ hourly wages, direct costs, and indirect costs. Labor costs typically make up around 30% of company expenses. If this percentage is too high or too low, you may need to adjust wages, direct and indirect costs, or service pricing.

Let’s say your business earns $250,000/year in gross revenue. You have two workers who earn a combined total of $60,000/year and cost an added $42,500 in direct and indirect costs. This means your employees cost $102,500/year, or 41% of your revenue. This is a little high, so you could decide to raise your prices to boost revenue and reduce your labor cost percentage.

Low labor costs can help increase your profit margin, while high labor costs will cut into profits. 

A healthy profit margin is usually 10–20% of your job costs or total revenue. Use our free profit margin calculator to double-check your margins and keep your business profitable.

An employee costs at least the minimum wage in your area, plus an extra 25–40% for direct costs like payroll and benefits. Federal minimum wage in the United States is $7.25/hour, but some states set a higher minimum wage requirement. That means you should expect to spend at least $9/hour on an employee, or $18,125/year—and possibly much more. Check out our free salary guides to understand what employees in your area and industry should be earning.

(Want to reduce labor costs? Start tracking employee hours to better understand how long a job takes, then use that information to create more accurate estimates.)