What Is Labor Cost in 2026?

Labor cost is the total amount you spend on employees—everything from wages to benefits to taxes. It’s usually your biggest expense if you run a service business.

When people say “labor cost,” they don’t just mean the hourly rate you pay workers. They mean the full cost of employment: the wage plus payroll taxes, health insurance, retirement contributions, paid time off, workers’ comp, and everything else that comes with having employees.

Quick Answer
Labor cost is the total expense of employing workers. According to the Bureau of Labor Statistics, total compensation for private industry workers averaged $45.65 per hour in June 2025. Wages make up 70.2% ($32.07/hour) and benefits account for 29.8% ($13.58/hour).

What’s Included in Labor Cost?

Direct wages and salaries: The base pay you promise employees—hourly rate or annual salary. This is what shows up on job postings.

Overtime pay: Hours over 40 per week paid at 1.5x the regular rate. Learn how to reduce overtime costs to control labor expenses.

Payroll taxes:

FICA taxes: 6.2% Social Security + 1.45% Medicare (employer match)
FUTA: Federal unemployment tax
SUTA: State unemployment tax

Health insurance: Employer contributions to medical, dental, and vision plans.

Retirement benefits: 401(k) matching contributions, pension costs, or other retirement plans.

Paid time off: Vacation days, sick leave, holidays, personal days. You’re paying for hours not worked.

Workers’ compensation insurance: Required insurance covering work-related injuries and illnesses.

Training and development: Onboarding costs, ongoing training programs, certifications, and professional development.

Uniforms and equipment: Safety gear, company uniforms, tools, or specialized equipment employees need.

Other benefits: Life insurance, disability insurance, employee assistance programs, tuition reimbursement, or gym memberships.

How Much Does Labor Really Cost?

According to the U.S. Bureau of Labor Statistics, here’s the breakdown for June 2025:

Private industry workers:

Total compensation: $45.65 per hour
Wages and salaries: $32.07 per hour (70.2%)
Benefits: $13.58 per hour (29.8%)

State and local government workers:

Total compensation: $64.94 per hour
Wages and salaries: $39.31 per hour (61.5%)
Benefits: $24.63 per hour (38.5%)

Government workers have higher benefit costs because they typically get more generous health insurance, pensions, and paid leave.

What’s New for Labor Cost in 2026?

Qualified overtime reporting adds compliance costs: Starting in 2026, employers must separately track and report qualified overtime on Form W-2 (Box 12 Code TT). This requires payroll system updates or manual calculations, adding administrative burden and potential error risk. Companies that can’t automate this tracking face higher labor costs.

Healthcare benefit costs continue rising: In 2026, employer health insurance contributions continue their upward trend, with many businesses seeing 5-8% increases in premiums. This directly increases the benefits portion of total labor cost, pushing some companies closer to or above the 30% benefits threshold.

State minimum wage increases: Multiple states implemented minimum wage increases for 2026, including California ($16.50), New York ($16.50), Washington ($16.66), and others. These increases ripple through labor cost calculations, especially for industries like retail and restaurants that employ many minimum-wage workers.

FICA tax rates remain stable: For 2026, Social Security tax remains at 6.2% (employee) + 6.2% (employer) on wages up to $168,600, and Medicare tax stays at 1.45% each with no wage cap. However, high earners pay an additional 0.9% Medicare tax on wages over $200,000.

What Is Labor Burden?

Labor burden (or “labor burden rate”) is the additional cost beyond base wages to employ someone—all those taxes, benefits, and insurance add-ons.

According to Construction Coverage, the average labor burden rate for private-sector employers is 42.3%. That means for every $1 you pay in wages, you’re paying an additional $0.42 in burden costs.

Labor burden varies by company size:

Companies with 500+ employees: 52.9% burden rate
Companies with fewer than 50 employees: 33.6% burden rate

Larger companies offer more generous benefits packages, driving up their labor burden.

Example calculation:

Base wage: $20/hour
Labor burden (42.3%): $8.46/hour
True labor cost: $28.46/hour

How Do You Calculate Labor Cost?

For a single employee:

Add annual salary + overtime + bonuses
Add employer payroll taxes (FICA match, unemployment taxes)
Add benefit costs (health insurance, retirement matching, PTO value)
Add other costs (workers’ comp, training, equipment)

Example:

Annual salary: $50,000
Overtime: $2,000
Payroll taxes (7.65% FICA + FUTA/SUTA ~1%): $4,500
Health insurance (employer portion): $8,000
401(k) match (3%): $1,500
PTO (10 days): $1,923
Workers’ comp: $800
Total labor cost: $68,723

So a $50,000 employee actually costs you $68,723—37% more than their base salary.

For your whole workforce: Add up all employee labor costs, or use this shortcut:

Total payroll (wages + overtime)
Multiply by 1.42 (average 42% burden rate)

This gives you a ballpark total labor cost.

What Is Direct vs Indirect Labor Cost?

Direct labor cost: Workers directly making your product or delivering your service. In a restaurant, that’s cooks and servers. In construction, it’s the workers on the job site. You can tie their hours directly to revenue.

Indirect labor cost: Support staff who don’t directly generate revenue but keep the business running. Think managers, HR, accounting, maintenance, security. These are overhead costs.

Why does this matter? Direct labor costs should scale with revenue. Indirect labor costs are more fixed. When revenue drops, you still need managers and admin staff, but you might reduce direct labor by cutting shifts.

What’s the Difference Between Labor Cost and Labor Cost Percentage?

Labor cost: The dollar amount you spend on employees (e.g., $500,000 per year).

Labor cost percentage: Labor cost divided by revenue, expressed as a percentage. It shows how much of every dollar earned goes to labor.

Example:

Monthly labor cost: $100,000
Monthly revenue: $300,000
Labor cost percentage: ($100,000 ÷ $300,000) = 33.3%

Labor cost percentage is a better metric for comparing efficiency across time periods or different businesses. A dollar amount alone doesn’t tell you if you’re spending too much—you need to see it relative to revenue.

How Can You Reduce Labor Costs?

Reduce overtime: Overtime costs 1.5x regular pay. Better scheduling and time tracking can cut unnecessary overtime.

Improve productivity: Same work with fewer hours = lower labor costs. Training, better tools, and process improvements help.

Control benefit costs: Shop for better health insurance rates, adjust 401(k) match percentages, or review voluntary benefits.

Optimize scheduling: Match staffing to demand. Don’t overstaff slow periods. Industries like healthcare, janitorial, and electrical benefit from demand-based scheduling.

Cross-train employees: Flexibility reduces the need for overtime when someone calls out sick.

Automate time tracking: Manual time cards lead to overpayment from rounding and buddy punching. Time tracking software cuts these losses.

Reduce turnover: Hiring and training new employees is expensive. Better retention lowers those costs.

What’s the Bottom Line?

Labor cost is your total investment in employees—not just wages, but the full package of taxes, benefits, and overhead. In 2026, that averages $45.65 per hour, with a 42% labor burden on top of base wages.

Here’s what matters:

Total labor cost averages $45.65/hour (wages $32.07 + benefits $13.58)
Wages account for 70.2% of costs, benefits for 29.8%
Labor burden adds 42% on average to base wages
Larger companies (500+ employees) have higher burden rates at 53%
A $50,000 employee actually costs about $68,723 after all add-ons
Direct labor costs should scale with revenue; indirect costs are more fixed

Need help managing labor costs? ShiftFlow’s workforce management tools automatically track hours, calculate overtime, optimize scheduling, and flag budget overruns. Explore our solutions or view pricing.

Sources

U.S. Bureau of Labor Statistics – Employer Costs for Employee Compensation, June 2025
Construction Coverage – Beyond Wages: The Total Cost of Employing Workers in the U.S.
Paycor – The Biggest Cost of Doing Business: A Closer Look at Labor Costs
U.S. Bureau of Labor Statistics – Employment Cost Index – September 2025

Frequently Asked Questions

What is labor cost?

Labor cost is the total amount a business spends on employees, including wages and salaries (70.2%), plus benefits like health insurance, retirement contributions, payroll taxes, and workers’ compensation (29.8%). For private industry workers, total labor cost averaged $45.65 per hour in 2025.

What is included in labor cost?

Labor cost includes direct wages and salaries, overtime pay, payroll taxes (FICA, FUTA, SUTA), health insurance, retirement contributions (401k matching), paid time off, workers’ compensation insurance, unemployment insurance, training costs, and uniforms or equipment.

What is labor burden?

Labor burden is the additional cost beyond base wages to employ someone—taxes, benefits, and insurance. The average labor burden rate for private-sector employers is 42.3%, meaning for every $1 in wages, employers pay an additional $0.42 in burden costs. Larger companies (500+ employees) have higher burden rates at 52.9%.

How do you calculate total labor cost?

Add annual wages/salary + overtime + bonuses + employer payroll taxes (7.65% FICA + unemployment taxes) + benefit costs (health insurance, 401k match, PTO value) + other costs (workers’ comp, training, equipment). Or use the shortcut: Total payroll × 1.42 (assumes 42% average burden rate).

What’s the difference between labor cost and labor cost percentage?

Labor cost is the dollar amount spent on employees (e.g., $100,000). Labor cost percentage is labor cost divided by revenue, showing what portion of each dollar earned goes to labor (e.g., 33%). The percentage is better for tracking efficiency over time.

How much does a $50,000 employee really cost?

A $50,000 employee typically costs about $68,000-$70,000 after adding payroll taxes, benefits, insurance, and other burdens—roughly 37-40% more than base salary. The exact amount depends on your benefits package and company size.

What is direct vs indirect labor cost?

Direct labor cost is workers directly producing your product or service (cooks, construction workers, nurses). Indirect labor cost is support staff (managers, HR, accounting). Direct costs should scale with revenue; indirect costs are more fixed overhead.

How can I reduce labor costs?

Reduce overtime through better scheduling, improve productivity with training and tools, control benefit costs, optimize staffing to match demand, cross-train employees for flexibility, automate time tracking to eliminate overpayment, and reduce turnover to lower hiring costs.