Keeping track of labor costs in your coffee shop will require constant attention to detail. and will be your most significant business expense.
To calculate labor costs for your coffee shop, begin by tracking all of the wages you pay your employees, plus the cost of employee benefits and payroll taxes. You can choose which way you prefer to track these costs; either on a quarterly, monthly, or weekly basis.
Direct and Indirect Labor Costs
The two subcategories of labor costs are direct labor and indirect labor. Direct labor is the labor used to make products, it includes wages for employees and workers on an assembly line. Indirect labor is the labor used to support or make direct labor more efficient, like people who maintain factory equipment. If you don’t calculate labor costs correctly, the price of goods and services will be inaccurate and damage your profits.
Fixed and Variable Costs of Labor
Your coffee shop might have two kinds of labor costs, fixed and variable. The cost of labor to run machinery is a variable cost. You can increase or decrease variable labor by adjusting your production. Fixed labor costs can include set fees for long term service contracts, such as you might have with your vendors. A vendor might supply you with products or do repairs and maintenance on your equipment.
Track Time and Attendance
Payroll is an essential part of your business, but one that most small business owners dread and want to get don’t with quickly. Payroll doesn’t usually happen quickly since there are lots of forms to utilize in order for you to keep up with federal and local tax rates, meet deadlines and manage requests from employees. The time a payroll management system saves you is invaluable.
Time and attendance systems are used to monitor when your employees start and stop work. You’ll know how many hours they worked and if they arrived on time or left early. The system will also monitor breads taken and absenteeism. Your labor costs will also be more controlled because you won’t overpay employees or pay for time they haven’t worked. Using this system will also help you stay in compliance with labor regulations regarding proof of attendance.
Hiring an accountant can cost your small business a lot of money, and many business owners want to use an accountant to manage their payroll, but you don’t have to go that route. Utilizing a payroll management system is far less money and saves time as well. Choose a payroll system that calculates employee pay and taxes and will automatically send your taxes and filings to the IRS and to your state tax department for you.
Some payroll packages include check printing, check signing and email reminders. All of these things will help your keep track of labor costs for your coffee shop. You won’t have to spend a lot of time on payroll and can spend it on your other business goals. With the right payroll process, you can log into the system from anywhere to process your payroll.
Payroll Taxes and Personal Withholding Allowances
Payroll taxes are a big part of calculating the labor costs of your coffee shop. Tax compliance requires you to keep up with federal, state, and local payroll taxes. You also have to make sure all forms are filled out correctly and submitted on time. Payroll taxes are withheld from an employee’s salary and has to be paid by you, the coffee shop owner. This tax is based on the wage or salary of each of your employees.
Calculate your employee’s payroll taxes by finding the gross income of each employee, add up the income exemptions, add up any pretax deductions like 401k and flexible account contributions, figure out the taxable income for each employee, find the tax you should use and calculate the federal income tax.
The formula is: taxable income=gross pay-exemptions-pretax deductions. An employee can claim themselves, their spouse, and dependents as exemptions, among other things. All income is taxable unless the tax code has a specific provision exempting it or allowing it to be offset by deductions.
Pre and Post Tax Deductions
A pre-tax deduction is taken out of an employee’s gross pay and reduces the employee’s taxable income. Some of the common pre-tax deductions include retirement funds like a 401k, health insurance and commuter benefits pertaining to perks you can give your employees to help them save money on expenses related to traveling to and from work.
Post-tax deductions are those that will be withheld after all other applicable taxes are take out of the employee’s paycheck. Examples include wage garnishments for payment of such things as child support or other financial obligations if ordered by a judge. Union dues can also be taken out of a paycheck after all taxes are deducted. Exemptions may also include charities and humanitarian needs.
Providing health insurance is a pre-tax deduction and will lower your employee’s taxable wages. This is because the benefit is deducted from gross wages, or before tax withholding. This is known as giving the employee a tax break; an employee will pay less in taxes than if the benefit were deducted on a post-tax basis.
Calculating Gross Income
Gross income is the amount of monthly income an employee receives. Calculating an employee’s gross income depends on how they are paid, either hourly or an annual salary. The formula for gross income of a person on a salary is the person’s annual salary divided by 12. If your employees are paid an hourly wage, then you will multiply their hourly wage by how many hours they worked in a week to arrive at their weekly income. Then multiply that number by the weeks in a year (52) to know their yearly wage.
Gross income includes wages, dividends, capital gains, business income, retirement distributions and other income. If there are any adjustments to am employee’s pay, they will be things like education expenses, alimony, or contributions to a retirement account. The adjusted gross income is never more than the gross total income. Total paycheck exemptions and the standard deductions or itemized deductions are subtracted from the employees adjusted gross income, (income minus adjustments), to figure your taxable income.
Types of Exemptions
There are two types of exemptions, personal and dependent. Unfortunately, the tax reform bill that became law in 2017 eliminated the personal exemption. It can no longer be claimed by your employees. A personal exemption was one that you could deduct for yourself and for each dependent you may have.
The dependent deduction is claimed mostly by people with children. It can also apply to other dependents you might be caring for, such as someone who is disable or an elderly parent. You’ll likely have employees claiming this exemption.
Calculate Labor Cost Percentage
Start by figuring out your coffee shop’s annual revenue by adding up all your sales before yearly taxes are taken out. Then take the labor costs you have figured up and divide it by the total revenue of your coffee shop. The last step in the process is to multiply this number by 100; this will tell you your shop’s labor and cost percentage.
Your total labor cost percentage should be under 30 percent. But this number can be affected by things like a slow down in your business, employee turnover and how efficiently your employees are working. For information on wages, contact the Fair Labor Standards Act set up by the federal government; it outlines how much you have to pay your employees.
To learn how many cups of coffee that shops sell in a day, click here.
Frequently Asked Questions
Fully and accurately automate your time-keeping systems. The right system will help you make sure that your employees are clocking in and out correctly, this reduces time theft and means you will effectively manage your overtime expenses. It will also help you monitor, manage, and predict labor costs in the future. You can streamline operations by providing employees with training and education. Employees who have been trained well can pick up the slack for new employees or when a co-worker is sick or not available for work.
Delegate responsibility to the right employee. Make sure that employee is up to the task and has the skills needed to do the job well. Be sure you communicate exactly what you need the employee to do and check back to make sure the job gets done correctly.
The W-4 form is one all employees must fill out so that you the employer can withhold the correct amount of federal income tax. The I-9, the Employment Eligibility form needs to be filled out to prove the person you want to hire is legally entitled to work in the United States.
To calculate the taxable income of your business you simply deduct the cost of goods sold, operating expenses and interest paid on debts from the gross sales of the company. Adjust for any tax deduction or credit as your final step.
Please note: This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs.
Hi! I’m Shawn Chun
My adventure in coffee began when I first launched my first coffee shop back in the early 2000s. I had to figure out so many things on my own and to make it worse within 2 years of opening two large corporate coffee chains moved in just blocks away from me!
As I saw smaller and even some larger coffee shops in the neighborhood slowly lose customers to these giant coffee chains and slowly close up shop, I knew that I had to start getting creative…or go out of business.
I (like you may be) knew the coffee industry well. I could make the best latte art around and the foam on my caps was the fluffiest you have ever seen. I even had the best state-of-the-art 2 group digital Nuova Simonelli machine money could buy. But I knew that these things alone would not be enough to lure customers away from the name brand established coffee shops.
Eventually, through lots of trial and error as well as perseverance and creativity I did find a way to not only survive but also thrive in the coffee/espresso industry even while those corporate coffee chains stayed put. During those years I learned to adapt and always faced new challenges. It was not always easy, however, in the end, I was the sole survivor independent coffee shop within a 10-mile radius of my location. Just two corporate coffee chains and I were left after that year. All told the corporate coffee chains took down over 15 small independent coffee shops and kiosks and I was the last one standing and thriving.
Along the years I meet others with the same passion for coffee and I quickly learned that it is not only “how good a barista is” that makes a coffee shop successful, but the business side of coffee as well.
Hence why I started this website you are on now. To provide the tools and resources for up and coming coffee shop owners to gain that vital insight and knowledge on how to start a coffee shop successfully.
Stick around, browse through my helpful blog and resources and enjoy your stay! With lots of LATTE LOVE!