Labor cost percentage — with the parts most people leave out.
Labor cost divided by revenue for the same period. Payroll taxes and benefits belong in the top half of that fraction, and leaving them out is why the number on the spreadsheet looks better than the one in the bank.
Labor cost percentage
The formula, and the part that goes wrong
Two numbers, one of which is usually built incorrectly.
labor cost ÷ revenue × 100 = labor cost percentage
Revenue is the straightforward half: net sales for the period. Labor cost is where the figure drifts, because it is not the payroll total. It is everything employing people costs you.
| Wages, salaries and overtime | $18,500 | 27.2% |
| Payroll taxes (FICA, FUTA, SUTA) | $1,750 | 2.6% |
| Benefits and insurance | $900 | 1.3% |
| Total labor cost | $21,150 | 31.1% |
On $68,000 of sales, the wages alone read 27.2% — a figure a manager would be pleased with. The real cost is 31.1%. Nothing was hidden; the taxes and benefits were simply in a different column.
What counts as a normal labor cost percentage
Budgeting conventions, not standards. Nothing here is a rule you can be held to.
| Service type | Commonly budgeted | Why |
|---|---|---|
| Quick service | 25–30% | Shorter menus, faster turns, less labor per cover. |
| Full service | 30–35% | Servers, bussers and a kitchen brigade on every shift. |
| Fine dining | 35–40% | The service is the product, so the labor is the point. |
Read a figure outside the range as a question rather than a verdict. A training week, a holiday week and a week you were two people short all move it, and none of them means the schedule is wrong.
Labor cost percentage: common questions
How do you calculate labor cost percentage?
Divide total labor cost by revenue for the same period, then multiply by 100. If a week costs $21,150 in labor on $68,000 of sales, that is 31.1%. The two figures must cover exactly the same days: a month of labor against a week of revenue is the most common way this number goes wrong.
What counts as labor cost?
Everything it costs to employ people, not just the pay: hourly wages, salaries, overtime, payroll taxes such as FICA, FUTA and SUTA, plus benefits like insurance and paid leave. Wages alone typically run several points below the real figure, which is why a payroll report and a profit and loss statement rarely agree.
What is a good labor cost percentage for a restaurant?
Quick service commonly budgets 25% to 30%, full service 30% to 35%, and fine dining 35% or more, because the service is the product. These are budgeting conventions rather than standards. A figure outside the range is worth a question, not a verdict — a training week or a short-staffed week both move it.
Should tips be included in labor cost?
Tips paid by customers are not your cost, so they stay out. What does belong is any cash wage you pay a tipped worker, plus the payroll taxes on the tips they report. If you take a tip credit, the cost in your books is the reduced cash wage, not the full minimum wage.
Why did my labor percentage rise when sales fell?
Because much of the schedule is fixed. Managers, openers and closers are needed whether or not the room fills, so when revenue drops the same labor cost is divided by a smaller number. It is the ratio that moved, not necessarily the spending — check the labor cost figure itself before cutting shifts.
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Last updated Thursday, September 24, 2026. Spotted something wrong? Report an error.