Free Labor Cost Calculator
Use our free labor cost calculator to price your total hourly labor rate, including employee wages, direct costs, indirect costs, and profit. Once you have your hourly cost, multiply it by the total hours for the project to get your full labor cost. Or, enter your hourly labor cost into our service price calculator and create a professional service estimate.
Easily calculate labor costs for accurate estimates
Labor Cost Calculator
Hourly Rate:
$0.00
The Hourly Rate you should charge in order to achieve your desired profit.
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Start Free TrialHow to calculate labor costs
How do you calculate labor cost? Start by gathering the following:
- Hourly salary – Combined hourly wages for all employees assigned to the job.
- Hourly direct costs – Non-salary expenses related to the workers doing the job, such as taxes and benefits
- Hourly indirect costs – Labor expenses for support staff who aren’t on the job site, like office administrators, including their salaries, taxes, and benefits
- Desired hourly profit – The net amount your business gets to keep after costs and expenses.
Knowing how to calculate labor cost is as easy as using this formula:
Hourly labor costs = (Hourly salary + Hourly direct costs + Hourly indirect costs + Desired hourly profit)
Say you’re pricing a job that requires one technician and support from your admin team for quoting, scheduling, and invoicing.
- Your technician’s hourly salary is $21
- Hourly direct costs (payroll and benefits) are $5
- Hourly indirect costs (admin support) are $18
- Your desired hourly profit is $8
Using the hourly labor costs formula, your total hourly labor rate is $52. This rate covers your technician’s pay, overhead, and profit goals.
Calculate labor costs using the formula above, or make it easier by using our free labor cost calculator to determine your hourly labor costs. Just plug in the key information above, and you’ll get accurate hourly labor costs ready for your service estimates.
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.
What are labor costs?
Labor costs are any fixed or variable expenses related to hiring, training, and compensating employees. They’re a key part of your service costs and help you price jobs properly.
Labor costs can include:
- Payroll
- Overtime
- Health care and benefits
- Bonuses
- Vacation and sick days
- Training days
- Insurance
- Meals
- Supplies
Understanding labor costs helps you price jobs for profit, nail your profit margins, and grow your business sustainably. Our free labor cost calculator takes some of the guesswork out, just enter your numbers and get accurate labor costs ready for estimates.
Direct vs. indirect labor costs
Direct and indirect labor represent different labor expenses within a home service business.
Direct labor cost includes the expenses accrued from the people doing the actual service work you’re business is getting paid for. It might be a house cleaner scrubbing bathrooms or a plumber fixing a leaky pipe. This labor cost is billable and directly tied to a specific service job.
To calculate direct labor, just add up hourly wages, overtime, bonuses, and payroll taxes for employees performing the hands-on work.
Indirect labor cost is part of your overhead and factors in the team members who keep your business running but aren’t directly involved in the hands-on work. This includes wages and expenses for office admin who schedule jobs, or bookkeepers who handle payroll and taxes. While these expenses don’t get billed directly to a job, they’re essential to keeping your service business organized and efficient.
To calculate indirect labor, add up the hourly wages and direct costs for support roles like your office staff and supervisors.
Once you have both direct and indirect hourly labor costs, plug them into our labor cost calculator along with salary and profit to see your total hourly labor costs.
FAQ
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Calculate your hourly labor costs by adding 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 your total hourly labor costs are $69. This is just one example of how to calculate hourly labor costs. -
To get project labor costs, determine the hourly employee 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 additional 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, follow this process for each employee and add up your totals. You can also adapt this formula to calculate weekly or monthly labor costs.
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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 additional $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 service business profitable. -
Using a labor cost calculator the right way helps you price smarter and remain competitive in your industry with confidence.
Get the most value from our free labor cost calculator with these best practices:
• Include all labor-related costs. Labor costs are more than just hourly wages. Make sure to factor in everything, from direct costs like benefits and taxes to indirect costs like admin and supervisors.
• Keep direct and indirect labor costs separate. Lumping them together makes it impossible to know the real cost of a job. Track direct and indirect costs separately to know exactly where your money is going.
• Factor in downtime to avoid hidden costs. Your team may not be billing 100% of their downtime (e.g., travel, getting tools, paperwork). Determine the average time each employee spends on non-billable tasks per week or month and factor it into your labor costs. This way, you cover all the time it takes to get the job done and don’t risk undercharging for your work.
• Always use up-to-date numbers. Labor costs can change over time—wages go up or down, and employees come and go. Set a monthly or quarterly reminder to review and update the numbers you use to calculate labor costs.
• Don’t rely on rough guesses. Guessing labor costs might seem quicker, but it’s a risky habit that can lead to undercharging, overcharging, and lost profit. Use service tracking software to track actual employee hours and job costs, from day one. -
An employee costs at least the minimum wage in your area. A good rule of thumb is you’ll pay 1.25 to 1.4 times their base salary to factor in things like payroll taxes, benefits, and so on. Some employment costs are required by law, while others will vary and factors like your location and industry.
For example, the 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 $9.06/hour on an employee, or $18,844/year—and possibly much more.
Looking 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.