One way that labor rates can be calculated is to take into account all of the costs associated with an employee. This includes hourly wages, payroll taxes and pension plans, followed by dividing the total of those costs by the number of hours that an employee works, according to Accounting Tools.
Dividing employee costs by the number of hours worked is referred to as a fully loaded labor rate by Accounting Tools. Labor rates can also be calculated by using the incremental labor rate. This method involves adjusting costs for any action that an employee might take, such as completing a certain job or working overtime. With the incremental labor rate, cost calculations may vary widely since overtime hours can increase rates quite significantly.
Also commonly built into labor costs, says Accounting Tools, is a company's standard profit percentage as well as a portion of the business' overhead. Additionally, some business owners choose to set labor rates to be competitive with whatever the general market rates are for a particular job or service. Companies usually set certain labor rate standards in order to control labor costs and to ensure the company's profitability in the long run, as explained by AccountingForManagement.org.