How do I calculate labor cost percentage?
The formula is straightforward: Total Labor Costs divided by Total Revenue, multiplied by 100. A business with $50,000 in monthly revenue and $15,000 in labor costs has a 30% labor cost percentage.
The math is simple. What trips up most business owners is including all the labor costs. Wages are just the starting point. You also need to add employer payroll taxes, workers’ comp insurance, health insurance contributions, paid time off, bonuses, and any other compensation you provide. Payroll taxes alone add roughly 8% to every dollar of wages before you count benefits.
If you only use base wages in your calculation, you’ll undercount your true labor cost by 15-30% depending on what benefits you offer. That gap matters when you’re comparing your numbers to industry benchmarks or trying to price your services correctly.
Use the same time period for both numbers. Monthly labor costs compared to monthly revenue. Quarterly to quarterly. Mixing March wages with full-quarter revenue produces a meaningless ratio that won’t help you make decisions.
What counts as a healthy percentage varies by industry. Restaurants typically target 25-35%, with quick-service operations on the lower end and fine dining higher. Professional services often run 40-60% because labor is the product being sold. Construction ranges widely based on how much work is subcontracted versus performed by employees.
Track this monthly at minimum. A rising labor cost percentage without corresponding revenue growth signals a problem. Either you’re overstaffed, prices haven’t kept pace with wage increases, or revenue is declining while headcount stayed the same. A bookkeeping service that delivers monthly financials lets you spot these trends before they become emergencies.
When the percentage runs high, the fix depends on the cause. Scheduling inefficiency needs tighter labor management. Wage creep without price increases needs a rate adjustment. Declining sales with flat staffing might mean reducing hours or not replacing departing employees. The numbers tell you something is off. Digging into the details tells you what to do about it.
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More Questions
Can a bookkeeper fix years of neglected books?
Yes. Bookkeepers regularly handle catch-up work for businesses with years of neglected records. As long as bank statements and basic documentation exist, the books can almost always be reconstructed and brought current.
Read answerWhat documents do I need for bookkeeping cleanup?
Bank statements are essential. Credit card statements, prior tax returns, and existing bookkeeping records also help. You probably won't have everything perfectly organized, and that's okay.
Read answerHow do I track subcontractor payments?
Track subcontractor payments by collecting W-9s upfront, setting up vendors in accounting software, and coding every payment to its job. Consistent tracking keeps you compliant and shows true project costs.
Read answerWhat is the difference between QuickBooks Online and Desktop?
QuickBooks Online is cloud-based software you access through a browser from anywhere. Desktop is installed on a specific computer. For most small businesses today, Online is the better choice due to accessibility, integrations, and ongoing development from Intuit.
Read answerHow do I handle change orders in my accounting?
Track change orders separately from your original contract. Each change order needs its own cost codes so you can see profitability on the original scope versus additional work.
Read answerWhat is utilization rate and how do I calculate it?
Utilization rate measures the percentage of available work hours spent on billable client work. Calculate it by dividing billable hours by total available hours, then multiply by 100.
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