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This question is about employer.
How to calculate labor cost percentage?
To calculate labor cost percentage, you must first calculate labor costs and then divide your labor costs by gross sales. To calculate labor cost, you must add gross wages to all other expenses, while factoring in actual hours worked. The first step in calculating labor costs is to determine gross wages. This can be done through a simple formula of multiplying annual working hours by gross hourly wage.
After you find gross wages, you need to determine actual working hours. While someone may be put on schedule to work those 2080 hours, did they? If they have PTO, that should be factored in. So, in this scenario, if someone had 10 days of PTO, that's equal to 10*8 or 80 hours, so that should subtract 2000 actual working hours.
The third step is to factor in all other expenses, such as anything that the company pays so that a person is able to successfully complete their job. This includes benefits such as insurance, retirement plans, education and training, supplies, and even meals at work. Payroll taxes and supplemental pay and bonuses must also be included.
Payroll taxes include FICA taxes, FUTA taxes, and state unemployment taxes, which vary from state to state. Once you have calculated all these taxes you can calculate labor cost by using a simple formula of total annual labor cost equaling gross wage and other annual costs.
Once you have your labor cost, you need to now determine your gross sales. A company's gross sales are the total sales of all products and/or services over a period of time. The number represents the total revenue of a business without deductions, returns, or allowances.
Once you have your number of gross sales, you simply need to divide your labor costs by gross sales and multiply that number by 100. For example, if your gross sales are $500k and labor costs are $140, you need to divide $140k by $500k, then multiply it by 100. This gets you a labor cost percentage of 28%.
Knowing labor cost percentage is crucial for a business to see how they are spending and if they are earning enough to offset their labor costs. If a labor cost percentage is too high, this may indicate that labor costs need to be lowered.
There are many programs online that help you to calculate labor cost percentages in your specific state, using the specific tax rates of your state. These can be extremely beneficial for you as they help to include all other expenses that need to be factored in when calculating labor cost percentages.
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