Quick Summary
- Labor cost % = total labor cost ÷ sales (before sales tax) x 100
- In the U.S., labor cost is not just wages: employer FICA and FUTA must be included
- Federal wage floors remain $7.25/hour (standard) and $2.13/hour (tipped cash wage)
- Targets are more useful when tied to prime cost (food + labor)
Why this metric matters
Many operators watch food cost closely but still feel cash pressure at month-end. In practice, labor is often the hidden reason. If wages are tracked without payroll taxes, or if prep and cleanup hours are undercounted, labor % looks lower than reality.
Labor cost percentage gives you a clean check: how much of revenue is being consumed by people cost.
The formula
Labor Cost % = (Total Labor Cost ÷ Sales Before Tax) x 100Use sales before sales tax in the denominator. Sales tax is collected and remitted, not operating revenue.
What to include in labor cost (US)
- Hourly wages and salaries
- Overtime premiums
- Employer payroll taxes
- Benefits and employer-paid allowances
- Owner/operator labor (if you cover shifts)
For payroll taxes, include at least:
- Employer FICA: 7.65% (Social Security 6.2% + Medicare 1.45%)
- FUTA: usually 0.6% effective rate when full credit applies
- State unemployment insurance (SUI): state-specific
U.S. wage rule snapshot (as of 2026-02-11)
The federal minimum wage remains $7.25/hour. For tipped employees under federal rules, the cash wage can be $2.13/hour, but total pay still must reach the applicable minimum wage.
Because many states and localities set higher rates, always apply the highest wage rule that covers your location.
5-minute monthly example
Assume one month of operations:
- Sales before tax: $52,000
- Base wages + salaries: $12,600
- Employer payroll taxes + benefits: $2,000
Total labor cost = 12,600 + 2,000 = 14,600
Labor Cost % = 14,600 ÷ 52,000 x 100 = 28.1%At 28.1%, this store may be healthy if food cost is controlled. If food cost is 33%, prime cost is 61.1%.
Set your target from prime cost
Target Labor % = Target Prime Cost % - Target Food Cost %Example:
- Prime cost target: 60%
- Food cost target: 31%
Target Labor % = 60% - 31% = 29%This gives a usable staffing target for scheduling and hiring decisions.
Common mistakes
- Using wages only and skipping payroll taxes
- Using tax-included sales in the denominator
- Ignoring owner labor
- Scheduling by habit instead of daypart demand
Do this now
- Pull last month sales before sales tax
- Sum wages, overtime, payroll taxes, and benefits
- Calculate labor cost % and compare with target
- Check overtime and slow-daypart coverage first
- Reprice or rework menu items with high labor minutes
Related Guides
- US Restaurant Labor Cost Calculator
- US Restaurant Prime Cost Calculator
- Food Cost Ratio Guide
- Prime Cost Guide
- Menu Engineering Guide