Labor Burden Is Not a Myth: Here’s What It Actually Costs You
You pay yourself $50/hour.
That is what you earned last year, so that is what you are worth, right?
Not quite.
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Take the free scorecard →There is something between “$50/hour” and what you actually need to earn called labor burden. And most contractors have no idea what theirs is.
What labor burden actually is
Labor burden is everything it costs to employ someone (even if that someone is you) beyond the hourly wage.
If you hire someone at $50/hour, your real cost is higher. You pay:
- Payroll taxes: 7.65% (Social Security and Medicare)
- Unemployment insurance: 1-6% depending on your state and history
- Workers compensation insurance: 25-45% for most trades (varies wildly; roofing is higher, interior work is lower)
- Health insurance (if you provide it): $400-1,200 per month per employee
- Tools and equipment: $5-15K per year per employee
- Vehicle: $3-8K per year per employee
- Training: $2-5K per year per employee
- Office time (payroll, scheduling, problem-solving): 5-10% of their billable hours
For a carpenter or electrician at $50/hour, labor burden can easily add 50-100% to that hourly cost.
So your “$50/hour employee” actually costs you $75-100/hour.
Why contractors ignore this
Nobody talks about it because:
- It is complicated and varies by trade and location
- Nobody wants to admit their labor is actually more expensive than they thought
- Contractors price jobs based on “what feels right” not math, so they do not calculate it
That is how you end up with a job that looks profitable at the bid stage and loses money at the finish.
How to calculate your labor burden
Start with your hourly wage. Let’s say $50.
Payroll taxes: $50 × 7.65% = $3.83
Unemployment insurance: Estimate 3% = $50 × 3% = $1.50
Workers compensation: This varies dramatically. For drywall, it might be 30%. For painting, 20%. Call your insurance broker or check your policy. Let’s say 25% = $50 × 25% = $12.50
Subtotal so far: $50 + $3.83 + $1.50 + $12.50 = $67.83 per hour
That is before health insurance, tools, or vehicle costs.
Health insurance: If you pay $600/month per employee, and they work 2,000 hours per year, that is $600 × 12 / 2,000 = $3.60/hour
Tools and equipment: $8K per year / 2,000 hours = $4/hour
Vehicle: $6K per year / 2,000 hours = $3/hour
Office/management time: $50 × 10% = $5/hour
New total: $67.83 + $3.60 + $4 + $3 + $5 = $83.43 per hour
Your “$50/hour employee” costs $83.43/hour. That is a 67% labor burden.
If you bid jobs based on $50/hour, you are pricing at 40% below your actual cost.
What to do about it
You have three choices:
1. Raise your labor rates
If your burden is 67%, your effective labor cost is $50 × 1.67 = $83.50/hour.
Add your target profit (30%) and you need to bill at $83.50 × 1.30 = $108.55/hour.
If you have been billing at $60/hour, you have a big gap.
2. Hire differently
Instead of W2 employees, some contractors use subcontractors (1099s). The sub brings their own burden.
This shifts the cost to the sub, but you lose control over quality and timeline.
3. Automate and systemize
Reduce the amount of labor your business needs. Use AI to draft estimates. Use job management software to reduce office time. Use prefab components to reduce field labor.
This is the long game, but it is the only way to scale without losing money per job.
The contractor who knows this
A contractor who understands labor burden does not underbid.
They know what $50/hour actually costs. They know their effective labor rate. They price accordingly.
They might lose a bid sometimes, but when they do win, the job is profitable.
That is not luck. That is math.
Want to calculate your exact labor burden and build a pricing model around it? AI for Contractors includes a labor burden calculator and markup spreadsheet. Or let’s consult if you want help building a custom system for your operation.
