Most service business owners underestimate their overhead by 20-40%. Find out exactly how much every hour of employee time costs you, so you can price your jobs for profit.
Now that you know your true labor costs, use WorkQuote to manage your estimates, invoices, and scheduling in one simple platform.
Charging clients based on what you pay your employees is a fast track to broken profit margins. Here is the math most businesses miss.
For every dollar you pay an employee, the government mandates FICA, FUTA, and SUTA taxes. On top of that, Workers' Comp insurance scales with payroll. These aren't overhead; they are direct labor costs.
If you pay for 52 weeks but an employee only works 48 due to holidays and vacation, your cost per productive hour skyrockets. You cannot bill a client for your employee's vacation time.
A 20% markup on base wages is likely a net loss once burden is applied. You need to apply your markup to the True Hourly Cost, not the base wage, to actually see a profit.
Many service business owners make the mistake of basing their prices solely on an employee's hourly wage. However, once you factor in payroll taxes, insurance, benefits, and non-billable time, the actual cost to your business is significantly higher. Use this guide to understand how to use the Labor Burden Calculator to uncover your true costs and set profitable billing rates.
Start by inputting the foundational numbers for your employee. This establishes the gross payroll amount before any additional costs are added.
Every dollar you pay in wages carries mandatory government taxes and insurance premiums. These are often referred to as "payroll burden." We have pre-filled average rates, but you should adjust them based on your location and business history.
This is where the "True Hourly Cost" often jumps unexpectedly. Even if you pay an employee for 40 hours a week, they might only be working on billable jobs for 35 hours due to time off. You still pay for the vacation time, but you cannot bill a client for it.
Once the tool calculates your "True Hourly Cost," use the profit margin slider at the bottom to find your target price.
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