How to Calculate Labor Rate

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One of the most important aspects of running a business with employees is being able to calculate the total monthly wages for each worker. This helps determine important decisions such as when to increase or decrease your work force and how much to charge for products or services. You must take into account three basic factors to calculate the labor rate properly: hourly wage, payroll taxes and fringe benefit costs. The sum of these figures gives you an hourly labor rate.

Things You'll Need

  • Payroll tax information
  • Hourly wage rate
  • Fringe benefit information

Set up the labor rate formula. The labor rate formula is the hourly wage plus the hourly cost of taxes for that employee plus the hourly cost of any fringe benefits or expenses. This may be expressed as labor rate (LR) = wage (W) + taxes (T) + benefits (B).

Find the hourly wage. This information is readily available on the employee's W2 form and is an amount greater than or equal to your state's minimum wage. For example, it could be $14 per hour.

Find the hourly cost of payroll taxes for that employee. Divide the total monthly payroll cost by the total number of hours worked to find the hourly cost. Use $600 in payroll taxes divided by 160 hours of total work as an example. This results in an hourly cost of $3.75 in payroll taxes.

Find the hourly cost of any fringe benefits paid to the employee. Divide the total cost of monthly fringe benefits by the number of hours the employee works during the month. Consider an employee that receives a daily stipend of $20 for meals. That results in $400 per month and a normal work month has 160 hours. The hourly cost of monthly fringe benefits is $2.50.

Enter the numbers into the formula to find the labor rate. In this example LR = W + T + B, so LR = 14 + 3.75 + 2.50. The labor rate for this individual is $20.25 per hour.

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