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Labor burden: what an employee hour really costs

The payroll taxes, insurance and benefits on top of a wage, built line by line for one worker's year, and why to estimate with the cost per productive hour.

Practical guide

By Steven Michael Barber · Published October 17, 2026 · Updated November 3, 2026 · 6 min read

Our job-costing guide prices a job with a single burden percentage on top of the wage, and says to get the real figure from your accountant. This guide builds that figure from its parts, so you can see where it comes from, which parts you control, and why the number you should put in your estimating sheet is higher than the one most people calculate.

The parts of the burden

Labor burden is everything an employer pays because of an employee's hours, beyond the wage itself. For a field worker in a small trade it has five kinds of line:

• Social Security and Medicare. The employer matches the employee's share: 6.2 percent of wages for Social Security, up to the yearly wage base, and 1.45 percent for Medicare with no cap, which IRS Publication 15 lists together as 7.65 percent. For a worker earning under the wage base the full 7.65 percent applies to every dollar.
• Unemployment insurance. Federal unemployment tax is 6.0 percent of the first $7,000 of each employee's wages, and an employer that pays its state unemployment tax on time takes a credit of up to 5.4 percent, leaving 0.6 percent, which is $42 per employee per year (IRS Topic 759; more in a state with a federal unemployment credit reduction). State unemployment tax is set by each state on its own wage base, at a rate that depends on the employer's claims history; new employers get a standard rate.
• Workers' compensation insurance. Priced per $100 of payroll by job classification, and the one item that varies most: clerical work is a few cents, roofing and excavation can be well into double digits. Your policy's declarations page lists the rate for each class code you carry.
• Benefits. The employer's share of health coverage, retirement contributions, and anything else paid on the employee's behalf. The Bureau of Labor Statistics' survey of employer costs puts benefits at roughly 30 percent of total compensation across private industry in its 2024 and 2025 releases, a figure that counts the legally required payroll taxes above as benefits; small trades are often lower, but it is rarely nothing once health coverage is offered.
• The small items. Uniforms, personal protective equipment, hand tools, phone, training courses and certifications, and the employer's time administering all of it.

Worked example: one worker's year, line by line

Take a worker paid $24.00 an hour for a standard 2,080-hour year, which is $49,920 in wages. The statutory lines use the IRS rates above. The state unemployment, workers' compensation and benefits lines are illustrative figures chosen to look like a small trade; yours come from your state notice, your policy and your benefits invoices.

The burden on this worker is $12,000 a year, which is 24.0 percent of wages. Divided over the 2,080 paid hours, the worker costs $29.77 an hour. That paid-hour rate does not yet recover paid time away from jobs; the next section shows how to allocate it.

Paid hours are not billable hours

The employer pays for 2,080 hours, but the worker is not on a job for all of them. For this illustrative example, allow ten paid holidays, ten days of vacation, five sick days and three days of training or safety meetings: 28 days in all. Those 224 paid hours leave 1,856 productive hours from which to recover the whole $61,920. Use your own leave policy and time records for this allocation:

cost per productive hour = total employer cost ÷ productive hours = $61,920 ÷ 1,856 = $33.36

Against the $24.00 wage that is an effective burden of 39 percent, not 24. The difference is entirely the paid time that is not worked, and it is the part of the burden that estimators most often leave out, because it does not appear on any invoice. On a 28-hour job the three ways of counting give very different labor costs:

An estimator using the wage alone under-recovers $262 of real cost on this one small job, before any overhead or margin. Over a season of such jobs that is the difference between a profitable year on paper and a profitable year in the bank account.

Which lines move the number

Three lines dominate, and only one of them is fixed. The federal payroll taxes are set by law and, with the state unemployment rate in the example, add about 8.2 percent of wages for a worker under the Social Security wage base; the only part to decide is the state rate, which follows your claims history. Health coverage is a policy choice that adds a fixed dollar amount per worker, so it weighs more on lower wages than on higher ones. Workers' compensation depends on the classification, and it swings the result: at $2.00 per $100 of payroll the productive-hour cost in the example falls to $32.56, at $10.00 it rises to $34.71, with everything else unchanged. If a worker splits time between a low-rate class and a high-rate one, the classification of each hour matters to the insurer and to the estimate.

Paid time off is the other lever. Every day of paid leave removes eight productive hours from the year without removing any cost, so a generous leave policy raises the hourly cost even when the wage does not change. That is not an argument against leave; it is an argument for pricing it in.

Using the number

Use the productive-hour cost as the labor rate in your estimating sheet if you recover paid time away from jobs through that rate. If you already recover those wages through overhead, keep the allocation there rather than counting them twice. In our Job-Cost Tracker, the labor rate is on the Settings tab. Keep its supporting burden calculation in a separate sheet with the year's actual figures, and update it when a rate notice, renewal or new hire changes the inputs.

The same arithmetic answers the subcontractor question. A subcontractor who invoices $34.00 an hour and carries their own insurance and taxes costs about the same as this employee's $33.36 productive hour, and nothing on days with no work. The comparison is fair only when both sides are counted the same way: the subcontractor's invoice against the employee's full cost per productive hour, never against the wage.

What this guide leaves out

The statutory rates are the federal ones and can change from year to year; check the current Publication 15. State rules differ on unemployment wage bases, on disability and family-leave contributions that some states levy on employers, and on workers' compensation. Overtime, shift premiums and bonuses change the wage line and the taxes on it. And overhead, the rent, trucks, insurance and office time that do not attach to any one worker, is a separate recovery problem, covered in the job-costing guide. Your accountant and your payroll provider have the real figures for your business; the worked example shows how to assemble them, not what they are.