Labor Burden: How to Calculate Your Fully Burdened Labor Rate
Does a tech you pay $31 an hour really cost you $31 an hour?
No. Every paycheck comes with costs that never show up on the pay stub. Payroll taxes. Workers' comp. Health insurance. Together, they're called labor burden.
Most trades owners price their work off the hourly wage. That's how a shop stays busy all year and still comes up short.
Here's how to find your real number.
What Is Labor Burden?
Every employee costs you money in two buckets.
The Paycheck Bucket. This is the wage you agreed to pay. $31.25 an hour, or $65,000 a year.
The Hidden Costs Bucket. This is everything you pay on top of the wage, just because that person works for you. That's labor burden.
Your labor burden rate is the Hidden Costs Bucket as a percentage of the Paycheck Bucket. Your fully burdened labor rate is both buckets added together, per hour.
One note before the math. Labor burden is for employees, the people you pay through payroll on a W-2. Subcontractors are different. You pay a sub's invoice, and the sub covers their own taxes and insurance. For more on that line, see 1099 for Subcontractors.
What Goes Into Labor Burden
Payroll Taxes You Pay as the Employer
These are set by law, and you pay them on top of what you withhold from the employee.
Social Security: 6.2% of each employee's wages, up to $184,500 in 2026.
Medicare: 1.45% of all wages. There's no cap.
Federal unemployment (FUTA): 0.6% of the first $7,000 per employee, in most states. That's after a credit for paying your state unemployment tax. In a few states, the credit is reduced and you pay more.
State Unemployment Tax
Every state charges its own unemployment tax. The rate depends on your state, how long you've been in business, and how many former employees have claimed unemployment. Your state sends you your rate each year.
Workers' Comp Insurance
Workers' comp pays for on-the-job injuries. It's usually priced per $100 of payroll, and the rate depends on the kind of work. An office manager costs far less to cover than a tech on a roof or under a house. Your policy shows your rate for each job type.
Benefits
Anything you pay toward health insurance, a retirement match, or other perks belongs here too.
What About Paid Time Off?
Vacation days and holidays are paid hours where nobody bills a customer. You can count them as labor burden. Or you can do what we do in the example below: use billable hours to price your work. Billable hours already leave out time off, so you don't count it twice.
How to Calculate Labor Burden, Step by Step
Here's an example. Say you employ an HVAC tech at $65,000 a year. The tax rates below come from the IRS. The state unemployment rate, workers' comp rate, and insurance cost are made up for the example. Use your own.
Step 1: Add Up the Hidden Costs Bucket
Cost | How it's figured | Per year |
|---|---|---|
Social Security | 6.2% × $65,000 | $4,030 |
Medicare | 1.45% × $65,000 | $943 |
Federal unemployment | 0.6% × $7,000 | $42 |
State unemployment (example) | 3.4% × $7,000 | $238 |
Workers' comp (example) | $5 per $100 of payroll | $3,250 |
Health insurance (example) | Your share of the premium | $6,000 |
Total labor burden | $14,503 |
Step 2: Find Your Labor Burden Rate
Labor burden rate = total labor burden ÷ total wages × 100
$14,503 ÷ $65,000 × 100 = about 22%
So for every dollar of wages, this tech costs you about 22 cents more.
Step 3: Find Your Fully Burdened Labor Rate
Fully burdened labor rate = (wages + labor burden) ÷ hours
Wages plus labor burden is $79,503 a year.
Per paid hour, that's $79,503 ÷ 2,080 hours = about $38 an hour. Not $31.25.
But customers don't pay for every hour you pay your tech. Driving, the shop, and callbacks eat into the day. So for pricing, divide by billable hours instead. A billable hour is an hour a tech spends on a job you can charge for.
Say this tech bills about 1,400 hours a year.
$79,503 ÷ 1,400 = about $57 per billable hour
That's the number your prices have to beat. Using the wage alone, you'd have guessed about $46.
What This Does to Your Prices
In How to Calculate Overhead for a Trades Business, the same two-tech HVAC shop had about $46 of overhead per billable hour. Using wages only, each billable hour cost about $92 before parts and profit.
Now add labor burden.
Tech, fully burdened: about $57 per billable hour
Overhead: about $46 per billable hour
Total cost per billable hour: about $103, before parts and profit
At $95 an hour, that shop isn't making $3 an hour. It's losing about $8.
That's why labor burden matters. It's not a rounding error. In this example, it's the difference between a small profit and a loss on every hour your techs bill.
Common Mistakes
Using the wage as the cost. The wage is only the Paycheck Bucket.
Forgetting the caps. FUTA and state unemployment taxes stop once each employee's wages pass a yearly limit. For FUTA, it's $7,000. Your state sets its own. That's why these taxes are bigger in January than in October. Use a full year of costs, not a single month.
Using one workers' comp rate for everyone. Office staff and field techs have different rates. Figure each job type on its own.
Dividing by paid hours when you price. Use billable hours. Time off, drive time, and shop time are real costs, and they have to be covered by the hours you do bill.
Where Your Books Come In
You can only calculate labor burden if your books show it. That means payroll taxes, workers' comp, and benefits each sit in their own account, not lumped into one "payroll" line.
When the books are set up that way, your labor burden is a few lines on your Profit and Loss report. Add them up, divide by wages, and you have your rate. Check it every quarter, and again whenever your workers' comp renews.
Key Takeaway: Your techs cost more than their wages. Add employer payroll taxes, unemployment tax, workers' comp, and benefits, and a $31.25 tech costs about $38 per paid hour. Per billable hour, it's about $57. Price your work off that number, plus your overhead, or busy months can still lose money.
At Civita Tax Solutions, we help home service business owners save money on taxes with all-in-one accounting. We handle your bookkeeping, advisory, and tax filing. You focus on the business. We handle the finances.
Want your labor costs broken out on one report every month? See our bookkeeping plans for contractors. Wondering what that costs? Read How Much Does an Accountant Cost for a Small Business?
Work in a specific trade? See how we handle bookkeeping and taxes for plumbers, HVAC contractors, electricians, landscapers, and painters.
