How to Calculate the True Cost of an Employee
Most contractors lose money on labor — not because they underpay their workers, but because they underprice their work.
If you're bidding labor at $35/hour because that's what you pay your carpenter, you're leaving money on the table at best and losing money at worst. The true cost of an employee is significantly higher than their wage. Here's the full calculation.
The Burden Rate Problem
Burden rate is the term for all the costs on top of an employee's base wage. On average, a contractor's burden rate adds 25–40% to base compensation. Most contractors either don't know this number or don't build it into their bids.
What Goes Into the True Cost
- Base wages — the hourly rate × hours worked. Starting point only.
- Payroll taxes (employer share) — Social Security: 6.2% of wages. Medicare: 1.45%. Federal unemployment (FUTA): typically 0.6% with state credit. California SUI: typically 1.5–6%.
- Workers' compensation — California rates vary widely by classification. Carpentry runs 8–12% of payroll. Roofing can be 25%+. This is often the biggest surprise for new employers.
- General liability insurance — typically allocated at 2–4% of labor cost.
- Paid time off — 10 days PTO = 4% of wages.
- Health insurance — average employer contribution in CA is $600–800/month per employee.
- Tools and equipment — even $50/month per employee adds up.
The Full Calculation
Example: Carpenter at $35/hour, 40 hrs/week, 50 weeks/year
Base wages: $70,000
Payroll taxes (11%): $7,700
Workers comp (10%): $7,000
General liability (3%): $2,100
PTO (10 days): $2,800
Health insurance: $8,400
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Total annual cost: $98,000
True hourly cost: $49/hour
Burden rate: 40%That $35/hour carpenter actually costs you $49/hour. If you're billing them at $45/hour, you're losing $4 for every hour they work.
What Hourly Rate Should You Charge?
Your billing rate needs to cover true labor cost, overhead (office, insurance, vehicle — typically 15–25% of revenue), and profit margin (target 15–20%).
Using our example:
$49 true cost ÷ (1 - 0.15 overhead - 0.15 profit)
= $49 ÷ 0.70
= $70/hour minimum billing rate