Contractor Labor Burden: What an Employee Really Costs

The problem: the paycheck is the visible part

When you employ someone, you sign up for costs in three layers, and only the first one is printed on the pay stub:

• Percentage add-ons. Employer payroll taxes (7.65% FICA, plus federal and state unemployment), workers' compensation (quoted per $100 of payroll by class code — trades commonly run several dollars, meaning several percent), and liability insurance tied to payroll. These scale with every wage dollar.
• Fixed annual costs per employee. Health insurance contributions, retirement match, small tools, phone, training, uniforms. These arrive whether the employee is on a job or in the shop.
• Non-productive paid hours. The layer almost everyone misses. Holidays, PTO, shop time, loading, weather days, safety meetings — hours you pay for that no customer is ever billed for. A full-time trade employee typically has 150–350 of them a year.

The third layer is the sneaky one, because it doesn't add cost — it removes the hours the cost gets spread across. Same annual dollars, fewer billable hours, higher true hourly cost.

The formula

Burdened rate = [ (Wage × Paid hours × (1 + Add-on %)) + Annual fixed costs ] ÷ (Paid hours − Non-productive hours)

Total what the employee costs for the year; divide by only the hours that land on jobs. That quotient — not the wage — is the number that belongs in every estimate.

Worked example: the $28 carpenter

• Wage: $28/hr × 2,080 paid hours = $58,240
• Add-ons at 25% (payroll taxes + comp + liability): × 1.25 = $72,800
• Health insurance contribution, tools, phone: + $6,000 = $78,800 total annual cost
• Non-productive paid hours: 280 (holidays, PTO, shop, weather) → productive hours = 1,800
• Burdened rate = $78,800 ÷ 1,800 = $43.78/hr — 56% above the wage

Now the damage math. Say this carpenter delivers 1,800 job-site hours a year and the estimates carried him at $35 "to be safe." The gap is $8.78 an hour — about $15,800 a year, on one employee, invisibly missing from the company's results. A five-person crew estimated this way leaks the price of a good truck every year.

Run your own people through the Labor Burden Calculator — once per classification (lead, journeyman, helper), then again whenever wages or insurance change.

Where this math goes wrong

• Guessing the workers' comp rate. Comp is quoted by class code on your declarations page. Roofing and framing codes can run several times a finish-carpentry code. Pull the real number; don't borrow one from a forum.
• Using 2,080 productive hours. Nobody bills 2,080. If you don't subtract the non-productive hours, the burden looks smaller than it is — precisely when it matters.
• Counting drive time inconsistently. If you bill travel in your rates, it's productive; if you pay for it but never bill it, it's non-productive. Pick one treatment and keep it — doing both directions at once double-counts.
• Forgetting yourself. If you swing a hammer, your hours carry a burden too. Owners who estimate their own labor at $0 are subsidizing every bid with unpaid work.
• Stopping here. Burden covers employment costs only. Office, trucks, advertising — that's overhead, recovered separately. See Overhead: the invisible line item and the Overhead Recovery Calculator.

What to do with the number

Feed it forward. The burdened rate powers the Crew Cost Calculator (what a crew-day costs), which powers the Break-Even Job Price Calculator (the floor under a bid), which powers the Bid Check Calculator (whether the number you're about to quote makes money). That chain — run in order — is the core of the Contractors & Trades hub.