Posted on July 19 2019
Should payroll taxes be included when calculating labor cost as a percentage of sales?
Answer: Keeping an eye on your labor cost percentage is a good way to keep costs in line and, since sales fluctuate and labor cost is variable, can be more useful than a hard budget number. I have a two-part answer:
Keep it consistent.
Labor cost should include all associated costs, including the percentage of salaried staff’s effort for the period, taxes, benefits, workers’ comp, insurance premiums and so on. In short, anything related to people working should be included so that you have an accurate picture of your labor costs.
Keep in mind, however, that the purpose of calculating your labor cost percentage is to use it as a benchmark or management tool to assess your performance. Be sure not to change the method you use to calculate it abruptly or without communication, or you won’t have the benefit of accurate data. For example, if you have not been including taxes and then add them, your labor cost will look artificially high. You may also want to subdivide your labor cost percentage as a management tool if you’ve identified a particular problem area. For example, if you are struggling with the cost of hourly cooks relative to food sales to determine whether a late night menu is worthwhile, you might want to break out just those numbers.
Given your question, let us assume you have not been including taxes in your labor cost percentage and now realize you should. Changing your methods takes some time. You might try using two numbers for a while so you can continue to compare apples to apples while setting the foundation for oranges to oranges in future periods.