Labor Burden 101: What Contractors Get Wrong.

The number on the W2 is not what the employee costs. The number on the W2 plus payroll taxes plus workers' comp plus unemployment plus benefits plus the hours nobody bills for — that is what the employee costs.

Most contractors know this in the abstract. Then they bid a job using base wage anyway, "make some room for overhead," and wonder six months later why the bank balance never grows. The gap between $28/hr and $42/hr is where the margin lives — and where most of it dies.

The trap that wrecks bids

Picture a $28/hr framer. You bid the job at $40/hr labor, figuring twelve bucks an hour of room is plenty for "the office and the trucks." You finish on schedule. You collect. You feel good.

Except FICA was 7.65%. Workers' comp at your trade code ran 18%. Unemployment, federal and state, came in around 2%. You contribute $600/month toward the framer's health insurance. He takes two weeks of PTO. He drove 90 minutes to the job site some days. He spent half a day reworking a punch list at no charge.

When you actually back into it from payroll and the books, that $28/hr framer cost you closer to $40.32/hr just loaded — and over $50/hr once you account for the hours he was on payroll but not on a billable job. The $40/hr bid wasn't a $12 margin. It was a $10 loss.

This is the trap. And the only way out of it is to know your actual labor burden percentage and bid against the loaded number, not the wage number.

What labor burden actually is

Labor burden is the cost of an employee on top of their gross wages. Every employer owes some of it; the size of the load depends on the trade, the benefits, and how the business runs.

The six buckets every contractor should add up:

• Federal payroll taxes (FICA). The employer pays 7.65% of gross wages — 6.2% for Social Security (up to the wage base) and 1.45% for Medicare. This one isn't optional and it isn't negotiable.
• Unemployment taxes (SUI + FUTA). FUTA is small — 0.6% on the first $7,000 of wages once you take the state credit. SUI varies by state and by your experience rating, but figure 1–4% of wages on the first few thousand. New employers usually get a default rate that adjusts as claims history accrues.
• Workers' compensation insurance. The biggest swing in the whole equation. Driven by your trade class code and your experience modifier, and applied per $100 of payroll. We'll talk about why this single line ruins most spreadsheets.
• Benefits. Health insurance, retirement matching, life and disability — anything the business pays toward on the employee's behalf.
• Paid time off. Vacation, holiday, and sick hours are paid wages with no billable job behind them. They land in the burden bucket because you're paying for hours that don't earn revenue.
• Non-billable hours. Drive time, shop time, training, meetings, callbacks, warranty work. Hours the employee is on the clock but no customer is being billed. The single most under-tracked line in contractor bookkeeping.

Add those six up against gross wages and you get your burden percentage. That's the number your bids have to recover before you make a dollar.

The 7 things contractors get wrong

1. Using base wage as cost

The most common mistake, by a wide margin. You bid jobs at "wage plus a markup" and never math out what "wage" actually means. The fix is calculating your real burden percentage once per year (and re-running it whenever something material changes — see #7) and bidding against the loaded number, every time.

2. Forgetting workers' comp varies wildly by trade

Workers' comp rates are per $100 of payroll, by class code. They are not even close to flat. Rough illustrative ranges:

• Roofers — often 35–50% of wages
• General carpenters — often 12–20%
• Electricians — often 4–8%
• Painters — often 8–12%
• Office staff — often under 1%

(These are ballpark ranges only. Pull your own from your declarations page — your exact rate depends on state, carrier, and experience mod.) The point: a 6-person crew with mixed class codes will have a different burden for every employee. Treating them all as one rate either under-prices the high-risk work or over-prices the low-risk work. Neither is good.

3. Treating 1099 subs the same as W2 employees

A genuine 1099 sub is not on your payroll. No FICA. No SUI. No workers' comp on their pay (they carry their own — verify it). Their bill is their bill. That's the whole appeal of subbing out work that doesn't fit your crew's strengths.

The trap: misclassification. If you direct the sub's hours, supply their tools, control how the work gets done, and they only work for you — the IRS may decide they're actually an employee. The IRS economic-reality test boils down to three buckets: behavioral control, financial control, and the nature of the relationship. Get this wrong and you'll owe back FICA, back SUI, back workers' comp premium, and penalties. When in doubt, get a 1099 W-9 on file and use a written subcontractor agreement — and don't sub out work to people who only work for you.

4. Not adjusting for overtime

Overtime is 1.5× the base wage. The burden percentage applies to whatever you pay, so a $28/hr employee at OT costs you 1.5 × $28 = $42 in wages — and then the burden runs on the $42, not the $28. If your busy season is heavy on OT and your bids are built off a straight-time burden calc, you're quietly bleeding margin every week of the summer. Track OT separately and either bid OT-heavy jobs at a higher rate or absorb the extra burden as a known cost of doing the work fast.

5. Ignoring non-billable hours

This one stings the most because it doesn't show up on any tax form. The employee is on the clock at the shop loading the truck — billable hour? No. Drives 45 minutes each way to a job — billable hours? Depends how you price it; usually no. Sits in the Monday-morning crew meeting — no. Comes back to a job two weeks after close to fix a punch list — no.

An 8-hour day with 90 minutes of drive plus 30 minutes of loadout is 6 billable hours. You're paying the burden on 8 and collecting revenue on 6. The loaded cost per billable hour is the loaded cost per paid hour, divided by the billable-hours ratio. For most contractor crews that ratio runs 70–85%. It is the single line item most likely to turn an "on-paper" winner into a real-money loss.

6. Using an "industry average" instead of YOUR number

Industry burden tables are easy to find online and easy to plug in. They are also wrong for your business. You don't have the industry's wages, the industry's WC mod, the industry's benefits plan, or the industry's billable ratio. The 30 minutes it takes to derive your own number from a single year of payroll and books is the single highest-ROI bookkeeping exercise most contractors will ever do.

7. Forgetting to re-derive when something changes

WC renews and the rate moves. SUI rate adjusts at year-end. A new hire lands at a different wage band. Health insurance premium goes up 12%. The business adds a 401(k) match. Each of these changes the burden percentage — and a stale burden percentage prices stale labor. Re-run it at year-end, at WC renewal, and any time the benefits package changes.

How to calculate YOUR burden % — the simple method

The formula:

Burden % = (Total annual employer cost − Total annual gross wages) ÷ Total annual gross wages × 100

The "total annual employer cost" is gross wages plus every burden bucket. Easiest way to do this is run it per employee for one year and average — or, for a small crew, run it against the whole payroll.

Worked example, single employee, $28/hr, 2,080 paid hours (40-hour week × 52):

• Gross wages: $28 × 2,080 = $58,240
• FICA (7.65%): $4,455
• SUI + FUTA: ~$1,200 (state-dependent)
• Workers' comp at 18% (general carpentry illustrative): $10,483
• Health insurance ($600/mo employer share): $7,200
• PTO (2 weeks @ $28): $2,240
• Total burden: ~$25,578

Burden percentage: $25,578 ÷ $58,240 = ~44%.

Loaded hourly cost: $28 × 1.44 = ~$40.32/hr.

And the kicker: if the employee bills only 80% of paid hours (the other 20% is drive, shop, meetings, callbacks), the cost per billable hour is $40.32 ÷ 0.80 = ~$50.40/hr. That is the number your bids have to cover before you make a dollar of margin.

Run this same calculation from your books at year-end. It will beat any industry table you can find — and unlike a table, it'll tell you which of the seven mistakes above is quietly hurting you.

What this means for your bids

If you were bidding at $35/hr thinking you were making $7/hr on a $28/hr employee, and reality is $40.32/hr loaded — or $50.40/hr once billable utilization is in — every hour on that job was a small loss. Multiplied across a season, that's the gap between a year where the business builds equity and a year where you wonder where it all went.

This is the kind of thing job costing is supposed to surface for you, every month, on every job. Without it, you find out at year-end — if you find out at all.

The shortcut: get a system that does this for you

The math above is doable in a spreadsheet. It falls apart the moment you hire your second employee at a different wage, change WC carriers mid-year, or add a benefits line. By employee number four, the spreadsheet is a museum piece and nobody trusts it.

That's what we do for clients. Monthly bookkeeping with the burden percentage updated as inputs change, applied to every job in job costing. The Project Tools that come included with BDB bookkeeping plans record GPS-stamped time and apply each employee's loaded rate to every job automatically — so the math runs itself instead of living in a spreadsheet nobody opens.

Bottom-line FAQ

What's a typical labor burden percentage for contractors?

Most contractor labor burdens land between 25% and 50% of base wages, depending on trade. Roofers and other high WC trades push toward the top; lower-risk trades like painters often sit in the mid-20s. The number that matters is your number, derived from your own payroll and benefits — not an industry average.

Do I burden my 1099 subcontractors?

No — a real 1099 sub is not on your payroll, so you don't owe FICA, SUI, FUTA, or workers' comp on their pay. But if you're treating someone as a 1099 who actually behaves like an employee (you set their hours, provide their tools, they only work for you), the IRS can reclassify them. You'll owe back taxes plus penalties. When in doubt, write a real subcontractor agreement and don't direct day-to-day work.

How do I find my workers' comp rate?

Pull the declarations page from your carrier. The rate is expressed per $100 of payroll, per class code. A $25.00 per $100 rate is a 25% WC load on wages for that employee — before experience modification. Mixed-trade businesses will have multiple class codes, each with their own rate.

Does overtime affect my labor burden?

Yes — and most contractors don't account for it. OT wages are 1.5× base, and the burden percentage applies to the higher wage, so the absolute dollar burden grows. Heavy OT during busy season pushes your effective annual burden higher than a straight-line calc predicts.

How often should I update my burden percentage?

At minimum, every time something changes: WC renewal, SUI adjustment, new health plan, new hire at a different wage, or a shift in billable ratio. Practically, run it at year-end close and again at WC renewal. Bidding off last year's burden is bidding off last year's costs.