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How to Use a Labor Cost Calculator to Improve Efficiency

October 25, 2018 | Staffing Blog

When calculating labor costs, many business managers and owners often make the mistake of simply multiplying the hourly rate by the number of hours the employee has worked. However, benefits along with federal, state and local fees must all be factored into the equation in order to get an accurate number. Another factor that can affect this figure is whether or not the employee is being compensated through a third-party.

If you are going to use a labor cost calculator, you will first need to be aware of all the contributors you should be taking into account. To help you out, we have assembled this list so you can properly make your calculations and inevitably improve efficiency by doing so.

The Different Elements of Labor Cost

There are different elements that affect how much each employee’s labor is costing you. These include:

Their Hourly Wage. An employee’s hourly wage refers to the dollar amount they are being paid each hour before any deductions, such as taxes, are made. These deductions do not affect your cost-calculations, so you should use the gross hourly pay rate before deductions when configuring direct labor costs.

The Different Tax Contributors. Employers are responsible for a certain percentage of the following tax contributors if the employee is in fact affected by them:

  • Social Security Tax (Employers match the 6.2% of an employee’s wages that go to the federal government for their Social Security retirement benefits, which is limited to the first $127,000 of wages earned).
  • Medicare Tax (Employers match 1.45% of the employee’s Medicare tax).
  • Federal Unemployment Tax (Employers match 6% of the first 7,000 dollars earned).
  • State Unemployment Tax (The percentage that employers match for this varies by state).
  • Local Payroll Taxes. (You city or county may require you to pay a payroll tax, this information can be found online).
  • Worker’s Compensation Insurance (This tax percentage also varies by state).

Your Company’s Unforeseen Costs. Unforeseen costs are a major part of employee expenses and are often left out in calculations. Some of these hidden costs of full- and part-time employees may include:

  • Unscheduled overtime hours. If your staffing is not optimized, you may be consistently paying more for individuals to work overtime.
  • Rework cost. This includes the cost of going back and correcting mistakes in the work be undertrained or unskilled employees.
  • Scrap cost. This bucket is for calculating other hours of low quality work or wasted productivity. For example, a poor measurement that needs to be fixed or material that needs to be scrapped after a mistake.

Get Help Calculating Your Company’s Unforeseen Costs

Third-Party Payroll Providers. If you are using a third-party provider to carry out your payroll, it can be difficult to determine what taxes you are paying for each employee. In this case, you would add your direct payroll costs to the percentage of payroll being charged by the provider.

In Conclusion

In order to calculate the direct cost of labor you are paying per employee, you will need to factor in all of the above components. These taxes and fees usually add 10% or more to the direct labor rate. Taking into account that a few of these costs only come out during a portion of the individual’s employment, companies will pay a higher percentage for their lower-paid employees. For more information on how to accurately calculate your labor cost and how using a staffing agency will impact this cost, contact us here.