The calculation
Labor cost percentage formula
First add every employer labor cost for the period. Divide that total by sales or revenue from the same period, then multiply by 100.
Total labor costWages + Overtime + Employer taxes + Benefits + Other labor costs
Labor cost percentageTotal labor cost ÷ Revenue × 100
Labor cost per hourTotal labor cost ÷ Paid labor hours
Method references: U.S. Bureau of Labor Statistics compensation-cost definitions and Toast’s restaurant labor-cost formula.
Build the complete numerator
What should labor cost include?
Use the amounts the employer incurs, not only take-home pay or base hourly wages. The BLS separates employer compensation into wages and salaries plus benefit costs, including paid leave, supplemental pay, insurance, retirement and legally required benefits.
- Regular wages and salaries: gross pay for hourly and salaried employees.
- Overtime and bonuses: premiums, shift differentials and employer-paid bonuses for the period.
- Employer payroll taxes: the employer’s share of applicable employment taxes and required contributions.
- Employer-paid benefits: health coverage, paid leave, retirement contributions and other benefits paid by the business.
- Other labor costs: workers’ compensation or other staffing costs included consistently in your internal measure.
Employment-tax reference: IRS guidance on employer and employee tax responsibilities.
Worked example
$100,000 of labor on $300,000 of revenue
A business records $75,000 of regular pay, $5,000 of overtime and bonuses, $8,000 of employer payroll taxes and $12,000 of benefits. Total employer labor cost is $100,000, which is 33.33% of $300,000 in revenue.
At a self-selected 28% target, the labor budget would be $84,000. The current total is therefore $16,000 above that target. The target is an operating assumption, not an industry recommendation.
Keep periods aligned
How to get a meaningful result
- Match the dates. Compare one week of labor with one week of sales, or one month with the same month.
- Choose gross or net sales consistently. Document whether refunds, discounts, tax and service charges are included.
- Use actual or scheduled labor deliberately. Actual payroll measures what happened; scheduled labor estimates what may happen.
- Avoid double counting. Do not add an employee withholding again if it is already part of gross wages.
The calculator does not assign a “good” percentage. Staffing needs vary by industry, service model, location and the way each business defines labor and revenue.
Related cost ratios
Labor cost, food cost and prime cost
Labor cost percentage measures staffing expense against sales. Food cost percentage measures ingredients or inventory used against food sales. Restaurants often add labor and cost of goods sold to examine prime cost, but each component should still be tracked separately so a change can be traced to staffing or purchasing.
- Labor cost percentage: employer labor cost ÷ revenue.
- Food cost percentage: food COGS ÷ food sales.
- Prime cost percentage: labor cost plus applicable COGS ÷ sales.