An employee costs more than the wage on the paycheck. Labor burden is the extra cost on top of wages, and leaving it out of your bids is a common reason contractors lose money on jobs that looked profitable.
Updated 25 October 2026.
What labor burden includes
- Employer payroll taxes, such as the employer share of Social Security and Medicare (7.65% in the United States).
- Unemployment taxes, which vary by state and by your history.
- Workers’ compensation insurance, which depends on the trade and your state.
- Employer-paid benefits such as health contributions.
- Other costs tied to each employee, such as uniforms or training.
The formulas
Burdened hourly cost = base wage x (1 + burden rate)
Worked example
- A worker earns $20 an hour for 2,080 hours, so base wages are $41,600.
- Employer payroll tax at 7.65%: $3,182.40.
- Unemployment taxes: $600. Workers’ compensation at 5% of wages: $2,080. Health contribution: $2,400.
- Total burden: $8,262.40.
- Burden rate: $8,262.40 / $41,600 = 19.86%.
- Burdened hourly cost: $20 x 1.1986 = $23.97.
These figures are examples only. Your insurance and unemployment rates will differ, so use your own invoices and payroll reports.
Why it matters for pricing
If you bid labor at $20 an hour, every hour actually costs you $23.97 before overhead and profit. Use the burdened cost as the starting point for estimates, then add overhead and profit. See markup and margin and how to set your hourly rate.
Use the burden rate in your bids
In the example the burden rate is $8,262.40 / $41,600 = 19.86%, so a $20 wage costs $20 x 1.1986 = $23.97 an hour. A job that needs 40 labor hours costs $958.80 in labor, not the $800 you get from the paycheck rate alone, a $158.80 gap on one job.
Divide by billable hours, not paid hours
Not every paid hour is productive. Suppose the worker is paid for 2,080 hours but 160 are holidays and time off and 240 go to travel, shop time and training. That leaves 1,680 billable hours. The full cost is $41,600 + $8,262.40 = $49,862.40, so each billable hour costs $49,862.40 / 1,680 = $29.68. A 40-hour job then costs $1,187.20 in labor.
Check your payroll tax figure
The 7.65% employer rate is 6.2% for Social Security plus 1.45% for Medicare. Social Security tax applies up to an annual wage limit that the IRS sets each year. Confirm the current rates in IRS Publication 15, the Employer’s Tax Guide. Unemployment tax and workers’ compensation vary by state, so use your own notices and policy.
Labor burden in Excel
- Hourly wage in B1, paid hours in B2, payroll tax rate in B3 (0.0765), workers’ comp rate in B4, unemployment in B5 and health contribution in B6.
- Total burden in B7:
=B1*B2*(B3+B4)+B5+B6. - Burden rate in B8:
=B7/(B1*B2). - Burdened hourly cost in B9:
=B1*(1+B8).
Once you know your real labor cost, set your price with how to calculate an hourly rate for a service business. To track crews, jobs and costs together, see the Home Service Business Bundle.
Use the calculator
Try the labor burden calculator with your own wages and costs, or work out your general overhead with the contractor overhead calculator.
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Frequently asked questions
What is a typical labor burden rate?
It varies widely by trade, state and benefits. Many employers see roughly 10% to 40% on top of wages, so calculate it from your own costs.
Is paid time off part of labor burden?
Paid time off is often counted as a cost of labor. If you pay for hours not worked, include it in your hourly cost or spread it over productive hours.
Do independent contractors have labor burden?
Not payroll taxes in the same way, but you should still price in their insurance and your costs of managing them. Check your local rules on worker classification.