Understanding Labor Burden: The Hidden Cost Killing Your Profits

The $20/Hour Myth

If you pay a technician $25/hour, what does that labor actually cost you?

Most contractors would say $25. They'd be very wrong.

The true cost—your labor burden—is typically 35-55% higher than the base wage. Understanding this number is critical for profitable pricing.

What Is Labor Burden?

Labor burden is the total cost of employing someone, including all the hidden costs beyond their hourly wage.

Base Wage: What you pay them per hour Labor Burden: Base wage + all additional employment costs

The Components of Labor Burden

1. Payroll Taxes (Employer Portion)

• Social Security: 6.2%
• Medicare: 1.45%
• Federal Unemployment (FUTA): 0.6%
• State Unemployment (SUTA): varies, typically 2-5%

Total: ~10-13%

2. Workers' Compensation Insurance

Varies dramatically by trade and state:

• Office workers: 0.5-1%
• Electricians: 4-8%
• Roofers: 15-25%
• General contractors: 8-15%

Total: 1-25% depending on trade

3. General Liability Insurance

Your GL policy is based partly on payroll:

• Typical: 3-8% of payroll

4. Health Insurance

If you offer it:

• Individual coverage: ~$7,500/year ($3.60/hour)
• Family coverage: ~$21,000/year ($10/hour)

5. Paid Time Off

If employees get PTO:

• 2 weeks vacation: 4%
• Sick days: 1-2%
• Holidays: 3-4%

Total: 5-10%

6. Other Benefits

• Retirement contributions: 2-6%
• Training and certifications: 1-2%
• Uniforms and PPE: 1%

Real-World Calculation

Let's calculate the true cost for an electrician paid $30/hour:

| Cost Component | % of Wage | Amount | |---------------|-----------|--------| | Base Wage | 100% | $30.00 | | Payroll Taxes | 11% | $3.30 | | Workers' Comp | 6% | $1.80 | | GL Insurance | 5% | $1.50 | | Health Insurance | 14% | $4.20 | | PTO | 8% | $2.40 | | Retirement | 3% | $0.90 | | Training/PPE | 2% | $0.60 | | Total Labor Burden | 149% | $44.70 |

That "$30/hour" employee actually costs $44.70/hour—49% more than the base wage.

Calculate Your Labor Burden

Use this formula:

Labor Burden = Base Wage × (1 + Burden Rate)

Where Burden Rate = Total % of all additional costs

For a 45% burden rate and $25 base wage: $25 × 1.45 = $36.25 true hourly cost

Why This Matters for Pricing

If you charge $75/hour for labor and your burden is $45/hour:

• Gross margin: $30/hour (40%)

If you charge $75/hour thinking your cost is $25/hour:

• You THINK your margin is: $50/hour (67%)
• Your ACTUAL margin is: $30/hour (40%)

You're making 40% less than you think on every job.

The Owner's Labor Trap

This gets worse for owner-operators who "don't pay themselves."

The Trap: "I don't have employees, so I don't have labor burden."

The Reality: You still have:

• Self-employment tax (15.3%)
• Health insurance
• Retirement savings (you ARE saving for retirement, right?)
• "Salary" you should be paying yourself

Calculate your labor burden as if you were an employee earning what you'd pay someone else to do your job.

Adjusting Your Pricing

Once you know your true labor burden, update your pricing:

1. Calculate your burden rate (typically 35-55%)
2. Apply it to all labor estimates
3. Check your current prices - are you undercharging?
4. Raise prices on underpriced services
5. Re-run financials with accurate labor costs

Common Mistakes

Mistake 1: Using last year's workers' comp rate Workers' comp rates change annually. Update your burden calculation every year.

Mistake 2: Forgetting seasonal variations If you give holiday bonuses or busy-season OT, factor it in.

Mistake 3: Not including non-billable time If technicians spend 30% of their time on non-billable work (drive time, training, admin), your effective burden is even higher.

Labor Burden Calculator

Here's a quick calculator:

Your Base Hourly Rate: $____

Burden Components:

• Payroll taxes (10-13%): ____%
• Workers' comp (1-25%): ____%
• GL insurance (3-8%): ____%
• Health insurance (0-15%): ____%
• PTO (0-10%): ____%
• Retirement (0-6%): ____%
• Other (1-3%): ____%

Total Burden %: ____%

True Hourly Cost: Base × (1 + Burden%) = $_____

Key Takeaways

1. Labor burden is 35-55% higher than base wages
2. Include payroll taxes, insurance, benefits, and PTO
3. Owner-operators still have labor burden
4. Recalculate your burden rate annually
5. Use the true cost in all estimates

Use EstimateBuilderPro's Labor Burden Calculator

Our software includes a built-in labor burden calculator that:

• Walks you through each cost component
• Automatically applies your burden rate to estimates
• Updates annually with current tax rates
• Tracks effective vs. billable hours

Start your free trial and finally understand your true labor costs.