It might appear that an employee's hourly rate is simply the wage he receives for each hour he works. That amount, however, is only part of the real cost, also called the burden rate. This rate includes employer taxes, employee benefits and direct labor costs. Knowing your employees' true hourly rate facilitates proper budgeting and helps you reach your profit objectives.
Step 1: Payroll Taxes
Determine your share of employment taxes. This includes:
 Social Security
 Medicare
 Federal unemployment
 State unemployment
 Other applicable state or local payroll taxes
Say the employee's standard hourly rate is $13, and you pay 9 percent in payroll taxes. Multiply $13 by .09 to get $1.17, then add that to her standard hourly rate to bring her cost per hour up to $14.17.
Step 2: Fringe Benefits
Calculate your share of employerprovided benefits, including:
 Paid time off such as vacation and sick leave
 Health insurance
 Retirement plan
 Workers' compensation
 Yearly bonus
 Training costs
 Uniforms
 Tools and equipment usage
To arrive at the hourly benefit rate, add your annual cost of benefits for the employee and divide the sum by the number of working hours in the year. For example, suppose an employee works 2,080 hours in a year and receives annual benefits of $11,000. When you divide $11,000 by 2,080, it equals $5.29 per hour in benefits.
Next, add the hourly benefit rate to the standard hourly rate plus the payroll tax rate. For example, $5.29 plus $13 plus $1.17 brings the cost per hour up to $19.46.
Tip

Hourly rates, payroll tax liabilities and fringe benefit rates vary by employee. To arrive at exact figures, use the rates associated with the respective worker.
Direct Labor Rate
Figure the hourly cost associated with direct labor. Say your company manufactures aprons and the following applies:
 Time it takes to produce one apron = one hour and 10 minutes
 Machine setup time = 15 minutes
 Machine downtime = 15 minutes
 Two mandatory paid breaks per day = 30 minutes
In this case, it takes two hours and 10 minutes to produce one apron.
To arrive at the total direct labor cost, multiply the amount of time it takes to make one unit by the employee's hourly rate, which includes payroll tax and benefit costs. For example, the hourly rate of $19.46 multiplied by 2.10 hours equals total cost per hour of $40.87.
Tip

If applicable, factor in overtime pay at 1 1/2 times the employee's regular pay rate in your direct labor cost calculation.