What Is Included in Labor Cost?

Labor cost is a major consideration for any employer. Your cost per employee goes beyond simply paying them for the work they do. You must also factor in payroll taxes, insurance and employee benefits.

Regular wages, salaries and piecework compensation are included in your labor cost. Wages paid in addition to regular wages are called supplemental wages, which are also included in your labor cost. Supplemental wages may take the form of overtime, commissions, bonuses, severance pay, retroactive pay increases, back pay, awards, prizes, nondeductible moving expenses, holiday pay, bereavement pay and vacation, sick and personal pay.

Wages paid to your employees are different from payments made to independent contractors. Employees are paid through payroll accounts, while contractors are typically compensated through accounts payable. Your labor cost for a contractor would not include the taxes or benefits that come with having employees. With a contractor, you simply pay the agreed-upon amount for the work in question. This might include labor, materials and other resources.

Employee labor costs include your share of Medicare and Social Security taxes and federal and state unemployment insurance. Depending on your state, you might also have to purchase state disability insurance and worker’s compensation insurance. In addition, the state and local governments might mandate that you pay an employment training tax and local payroll tax. Each tax and insurance has its own rate. To figure your cost for an employee, multiply your rate by the employee’s taxable wages. For example, as of 2012, you pay Medicare tax at 1.45 percent of all taxable wages. If an employee earns $30,000 for the year, all of which is taxable, you pay $435 in Medicare tax for that employee for the year.

If you provide your employees with company-sponsored benefits, any amount that you contribute is included in your labor cost. Such benefits might include training and seminar costs, employer-paid snacks, meals and entertainment, health and life insurance, 401(k) match, cell phone costs, uniforms, tools and equipment usage, and company vehicle usage and maintenance.

Your real cost for an employee is called your labor burden, which goes over and beyond the gross wages you pay her. It includes your hidden costs such as benefits and payroll taxes. For example, an employee earns $30,000 per year. If your annual hidden costs for that employee comes to $13,000, your real cost is $43,000.