Quick answer

Labor cost is more than the wage you pay. To get the fully burdened rate, add payroll taxes, benefits, insurance, and paid time off to the base wage, then divide by the hours a person is actually available to work, not the hours they are paid for. A $30 wage often costs $40 to $45 an hour once everything is counted.

This guide is written for agency owners, contractors, and service business managers who price work from labour and want profitable rates who want time tracking to support better planning, billing, reporting, and project decisions.

Start with the fully burdened cost formula

Burdened labor cost per hour = (annual wage + annual labor burden) ÷ annual productive hours. The burden is every cost of employing someone beyond the wage: employer payroll taxes, health and retirement contributions, paid time off, workers' compensation, equipment, and software seats. Productive hours are the hours actually available for work after leave and internal time, not the 2,080 scheduled hours in a year.

The two adjustments matter in opposite directions. The burden raises the numerator, and the shrinking of productive hours lowers the denominator, so both push the real cost above the wage. Skipping either one produces a rate that looks profitable on paper and is not.

  • Base wage: what the person is paid per hour
  • Payroll taxes: the employer share of Social Security, Medicare, and unemployment
  • Benefits: health insurance, retirement match, and other contributions
  • Insurance: workers' compensation and liability tied to the role
  • Overhead per head: software, equipment, and workspace

Work through a real example

Take an employee paid $30 an hour on a 40-hour schedule. Annual wage is $30 × 2,080 = $62,400. Suppose the labor burden adds $18,000: roughly $5,400 in employer payroll taxes, $9,000 in benefits, and $3,600 in insurance and per-head software. Total annual cost is $80,400.

Now correct the hours. Subtract 15 days of paid leave, 8 holidays, and 5 expected sick days, which is 28 days or 224 hours, leaving 1,856 available hours. The burdened cost is $80,400 ÷ 1,856 = $43.32 per hour. That is 44 per cent above the $30 wage, and it is the number your pricing has to clear before there is any profit.

Separate cost per hour from price per hour

The burdened rate is your floor, not your rate card. Price also has to cover business overhead the per-head figure did not include, such as rent, management time, sales, and software the whole company shares, plus the profit margin you are actually running the business to earn.

A common approach is to multiply the burdened cost by a target multiplier. If your burdened cost is $43.32 and you want to cover overhead and margin, a 2.5x to 3x multiplier puts the billing rate between $108 and $130 an hour. The multiplier depends on your overhead, not on what a competitor charges.

Do not forget non-billable productive hours

Available hours still include work that no client pays for directly: internal meetings, sales, training, and administration. If only 70 per cent of the 1,856 hours are billable, you have 1,299 billable hours to spread the full $80,400 across. On that basis the cost per billable hour is $61.89, considerably higher than the $43.32 cost per available hour.

This is why utilization and labor cost have to be read together. A low billable percentage does not just reduce revenue, it raises the cost of every hour you can actually invoice. Tracking billable versus non-billable time is the only way to know which number you are really pricing against.

Keep the calculation current with tracked hours

Labor cost is not a one-time spreadsheet. Wages change, benefit costs move, and leave varies year to year. Recalculate the burdened rate at least annually, and sooner after a pay change or a benefits renewal, so quotes are not built on last year's math.

When you should not overbuild this: a solo freelancer with no employees does not need a burden calculation at all, because there is no employer tax or benefit layer. In that case, set an hourly rate from a revenue target and realistic billable hours instead, and keep this method for when you start paying other people.

Where Zeitio fits

Zeitio helps teams connect tracked hours to clients, projects, tasks, reports, approvals, and invoices so time data becomes useful business context instead of another spreadsheet.

Start with simple time entries, review them weekly, and use the data to improve project planning, billing accuracy, and team workload decisions.

Compare Zeitio pricing or create a workspace to try the workflow.

Further reading

FAQs

What is a fully burdened labor rate?

The fully burdened labor rate is the total hourly cost of employing someone, including the wage plus payroll taxes, benefits, insurance, paid time off, and per-head overhead, divided by the hours they are actually available to work. It is almost always higher than the wage, commonly by 25 to 50 per cent.

How much more than the wage does an employee cost?

For most small service businesses, the burden adds roughly 25 to 50 per cent on top of the base wage. A $30 wage often becomes $40 to $45 an hour once employer taxes, benefits, insurance, and reduced available hours are counted. The exact figure depends on your benefits and local taxes.

Should I use paid hours or productive hours in the calculation?

Use productive, available hours, not the 2,080 scheduled hours in a year. People are paid for holidays and leave but do not produce billable work during them, so dividing cost by scheduled hours understates the true cost per working hour.

What is the difference between labor cost and billing rate?

Labor cost is what the person costs you per hour. The billing rate is what you charge the client, and it has to cover labor cost plus business overhead and profit margin. Charging your labor cost with no markup means the business earns nothing on the work.

How does billable utilization change labor cost?

The more non-billable hours a person has, the fewer hours you can spread their full cost across, which raises the cost of each billable hour. At 70 per cent utilization, an employee costing $43 per available hour can cost around $62 per billable hour.