Labor Cost Math: Start With Dollars, Then Percentages

If a week produces $10,000 in net sales (what customers paid for food and drink, after discounts and refunds, before sales tax and the tips passed to staff) and labor costs $3,000, labor cost is 30%. Divide the cost by sales, then multiply by 100: 3,000 ÷ 10,000 × 100 = 30%. For every $100 sold, $30 pays for the labor included in that number.

Decide what the labor number contains

Gross wages are not the same as take-home pay, and they are not the full employer cost. Start with hourly wages, required overtime and salaries. Add employer payroll taxes, workers’ compensation and benefits or other labor costs you actually bear. Keep the definition consistent between plan and actual results.

Employee tax withholding comes out of gross pay; do not add it again as another employer wage expense. Employer taxes are different. IRS Publication 15 lists 2026 employer Social Security at 6.2% up to its wage base and Medicare at 1.45%. That is not a complete burden estimate: unemployment, insurance, leave, benefits and other costs can apply.

One employee, one week

For a nonexempt employee with one $20 hourly rate and 45 worked hours, using the federal weekly overtime rule:

• 40 regular hours × $20 = $800.
• 5 overtime hours × $30 = $150.
• Gross wages = $950.
• A fictional 15% employer-cost allowance adds $142.50, producing $1,092.50.

The U.S. Department of Labor generally requires 1.5 times the regular rate after 40 hours in a workweek for covered nonexempt employees. State rules, multiple rates, bonuses and tip credits can change the calculation. A salary or manager title does not by itself settle exemption.

Combine employees after calculating their hours

Two employees each working 30 hours do not create 20 overtime hours because the role total is 60. One employee working 45 hours does create an overtime question. Calculate at the employee level, then total the restaurant.

Use the shift and labor planner. Rows represent paid working segments; split unpaid meals and overnight shifts correctly. Include receiving, prep, cleaning and closing. Review hours-worked rules; do not remove compensable time to meet a target.

A full week: three employees, one over 40 hours

A fictional counter restaurant schedules three people. Cook A works Monday to Saturday, 10:00 to 18:00, at $22. Cook B works Thursday to Sunday, 16:00 to 21:00, at $20. Counter C works Monday and Wednesday to Saturday, 11:00 to 17:00, at $18. Every segment is paid time; unpaid meal periods would be split out. The same weekly rule applies as above, the 15% employer-cost allowance is again fictional, and $200 of fixed weekly labor costs sit on top.

Full employer cost = $2,084 × 1.15 + $200 = $2,596.60. On $15,000 of net sales that is 2,596.60 ÷ 15,000 × 100 = 17.3%. The overtime inside that number is small but real: Cook A’s 8 extra hours cost $264, of which $88 is the half-time premium (8 × $11). Cook B and Counter C together work 50 hours with no overtime, because overtime is counted per person.

The planner has a “Load the worked example” button that fills in this exact schedule with the same sales, allowance and fixed cost. Compare its by-employee table with the one above, then replace the rows with your own week. Its percentage is arithmetic on what you entered; 17.3% is not a target or a benchmark.

Why the percentage rises when sales fall

$3,000 labor on $10,000 sales is 30%. The same labor on $8,000 sales is 37.5%. Payroll did not increase; the sales denominator fell. Before cutting a shift, find whether the cause is weak demand, a quiet service period, unnecessary overlap or a process requiring too much work.

If your chosen labor target is 30%, $3,000 of labor needs $3,000 ÷ 0.30 = $10,000 sales. The target is an assumption to test, not a universal staffing rule.

Sales fell or staffing changed: two different fixes

Take the three-person week above and let sales fall from $15,000 to $12,000. The full cost is still $2,596.60, so labor is now 2,596.60 ÷ 12,000 × 100 = 21.6%. Payroll did not move by a dollar. Before touching the schedule, find out why sales fell: fewer orders, a smaller average order, a closed day, or a service period that never fills. Each has a different fix, and only some of them are staffing.

Moving hours removes the premium, not the hours. If Cook B, who is under 40, takes Cook A’s Monday shift at Cook B’s $20 rate, Cook A drops to 40 hours and Cook B rises to 28. Wages fall from $2,084 to $1,980: $104 saved, which is the $88 premium plus the $16 rate difference on 8 hours. With the allowance, the week costs $2,477.00 (1,980 × 1.15 + 200), or 20.6% of $12,000. The same 98 hours are still worked, so the hours of coverage do not change. Hours on a schedule are not the same as capability: this only works if Cook B is available, is qualified for Cook A’s station on Monday, and any rest-day rules that apply to you are met.

Cutting a shift removes its whole cost, and its coverage. Dropping Counter C’s Wednesday shift saves 6 × $18 = $108 in wages, or $124.20 with the allowance; the $200 of fixed costs stays. If sales stay at $12,000, the week costs $2,472.40, or 20.6%, about the same percentage as moving the overtime, but now nobody is at the counter on Wednesday from 11:00 to 17:00. Before cutting, add a coverage check for that window in the planner. It only tests the windows you define, and the loaded example already shows two gaps (Monday kitchen after 18:00, Saturday counter after 17:00) that a cut would not fix.

Then test the sales the shift protects. That 20.6% assumes sales stay at $12,000 after the cut. A shift is worth keeping if the sales it makes possible leave more than its own cost after food and the other costs that would genuinely not be paid without those sales. At a fictional 35% for those costs, each $100 of sales keeps $65, so the shift pays for itself if cutting it would lose more than 124.20 ÷ 0.65 = $191.08 of sales that week. Suppose Wednesday lunch brings in $600 that would not happen without the shift. Sales become $11,400 and labor is 2,472.40 ÷ 11,400 × 100 = 21.7%, slightly above the 21.6% before the cut, not below it: the lost sales shrink the denominator by more than the saved wages shrink the numerator. Operating profit falls by 600 × 0.65 − 124.20 = $265.80. Count each avoidable cost once. The shift being cut is already the $124.20, so it is not also a variable cost of those sales; other labor that would truly not be paid without the sales belongs in the avoidable costs. The break-even calculator is for the whole business plan and its contribution per $100 of sales; the guide on closing during slow hours works through this one-shift marginal decision in full.

Practice before making a decision

What is $4,500 labor on $15,000 sales? First 4,500 ÷ 15,000 = 0.30, then ×100 = 30%. What sales support $4,500 labor at 25%? 4,500 ÷0.25 = $18,000. Try the free math lessons, then check a proposed wage in the hourly-pay budget tool.