Do you know exactly what cost of labor entails? Chances are you’ve heard of the term “cost of labor” but you think it’s just payroll wages. But it’s not. It’s many expenses tied to employee labor.
In this blog, I’m breaking down the difference between wages and total labor costs, so you can finally see why it costs more to hire and retain your employees than just their salary.
Wages Are Simple. Cost of Labor Is Not. 🤯
Wages = the dollar amount your employee is paid. Hourly or salary, it’s the clear rate of pay.
Labor = the total cost of having employees. It’s what’s quietly eating up your cash behind the scenes.
🧾 Labor includes:
- Payroll taxes
- Health benefits
- Retirement plans
- Bonuses + commissions
- Sick time, vacation, and holiday pay
- Training, onboarding, and development
- Software or admin support tied to employee operations
All of these things add up, and if you’re not tracking them, you’re probably underpricing your services and products.
3 Types of Labor to Track 📊
Here’s where most business owners miss the mark: not all labor is created equal. Let’s break it down:
✅ Direct Labor = team members who create the product or deliver the service
✅ Indirect Labor = support staff (like admin, marketing, or customer service)
✅ Overhead Labor = roles that keep your biz running but don’t directly produce revenue (managers, HR, ops)
Knowing which is which helps you price, hire, and grow intentionally, focusing on direct labor hires first and indirect/overhead second.
Cost of Labor vs Overhead: What’s the Difference? 🔍
Here’s a simple way to think about it:
Cost of Labor (COL):
If someone is hands-on in making or delivering what you sell, their pay is part of your cost of labor.
Overhead:
If someone helps the machine run (but isn’t touching the product or client), their pay hits overhead.
Example:
The tech who installs your client’s floors = COL
The manager scheduling those installs = overhead
Why It Matters to Your Bottom Line 💥
When you understand your total labor costs, not just wages, a few powerful things happen:
📌 You build a payroll budget that actually reflects what it costs you to run your business
📌 You price your products/services correctly, because they reflect total costs
📌 You stop overpaying for roles that don’t serve your margin
📌 You catch cash leaks before they drown your profits
Final Thoughts from Your Favorite Bookkeeper 🧡
Wages are just one part of your payroll story. If you’re not tracking the full cost of labor picture: direct, indirect, and overhead, it is the reason you cannot get ahead on your cash flow and profit margins. Your bookkeeping can only protect you when it is up to date and done correctly!.
✨ Want help getting this clarity? Hire us to be your bookkeepers. We’ll break down your labor costs, set up clean reports, and show you how to make strategic hiring and pricing decisions.
📚 Want to DIY it? Grab my book and workbook on Amazon. I walk you through it step-by-step with the STOP Method™ so your labor costs don’t sneak up on you.
👉 Because at the end of the day, cash flow isn’t luck, it’s strategy
