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Track hourly labor costs and profitability by project in QuickBooks Online

SOLVEDby QuickBooks376Updated January 08, 2024

Learn how to use projects to track your labor costs and profitability in QuickBooks Online Plus, Advanced, and Accountant.

Once you've set up your project, you can track labor costs in one of two ways.

  1. You can use payroll expenses, which show up after you run payroll.
  2. You can use estimated hourly costs, which show up right away. But they might be less accurate.

Both methods work whether you use QuickBooks Online Payroll or another payroll option. Plus, you can switch between them as needed. We'll show you how to set up both of them to track labor expenses for your project.

To watch more how-to videos, visit our video section.

Step 1: Learn more about payroll expenses and hourly cost estimates

Payroll expenses are your total costs to run payroll. This includes employee wages and other direct costs like taxes and workers' comp insurance. Keep in mind that if you have QuickBooks Online Payroll, the payroll expenses will only post to your project after you've run payroll.

Estimated hourly costs multiplies the hours worked by a fixed per-employee rate, which is helpful if you don't have a payroll solution but still want to estimate your labor costs for each project. Estimated hourly costs can include direct payroll costs and your overhead costs that are not paid through payroll like electricity at the office or snacks at the jobsite. They're also a good estimate of how your project is doing between payroll runs, since payroll costs only post to your project after you run payroll.

Once you've set up your payroll expenses and your hourly costs, you can use either one to see your project's labor costs.

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Step 2: Set up payroll expenses in the chart of accounts

If you use QuickBooks Online Payroll, your payroll expenses are set up automatically in your chart of accounts, so you're all set. Projects will use data from your most recent payroll to calculate your payroll expense labor costs.

If you don't use QuickBooks Online Payroll, you can still set up your chart of accounts to track your payroll expenses. You'll just have to enter the expenses manually each time you run payroll.

  1. Go to Settings ⚙ and select Chart of accounts (Take me there).
  2. Select New.
    Note: If this opens the New category window instead of the Account window, you’re creating a subaccount and will need to switch to accountant view to continue.
  3. In the Account Type ▼ dropdown, select Expenses.
  4. In the Detail Type ▼ dropdown, select Payroll Expenses.
  5. Enter a name for the account in the Name field.
  6. In the Default Tax Code ▼ dropdown, select an applicable tax code.
  7. Select Save and Close.
  8. When you manually enter your payroll expenses, choose the new payroll expense account you made. QuickBooks will use this data to calculate the payroll expenses for projects.

Tip: If you want to set up multiple accounts—so that you can track wages and taxes separately, for example—you can do so by creating subaccounts. Just follow the instructions above, but check the Is sub-account box and choose the parent account you created above. Then, track each payroll expense to the correct subaccount.

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Step 3: Enter hourly cost rates for each employee

Since you can use hourly costs or payroll expenses to track labor costs, you can decide if you want to set up hourly costs or not. If you use QuickBooks Online Payroll, you can just use your payroll expenses to see your labor costs. But remember, you won't see the costs in projects until after payroll is processed. If you want to estimate your labor costs between payroll runs or if you don’t have payroll, you can use estimated hourly costs.

To estimate your fully-burdened hourly cost for each employee, you can enter employee wages, and other costs like taxes and workers' comp insurance, as an hourly cost rate. Then you can use these rates to estimate your labor costs.

Here’s how to set up hourly costs:

Important: Set up your hourly cost rates before you start tracking time in QuickBooks Online or in QuickBooks Time. Hourly cost rates only apply to time that is tracked after the hourly cost rate is set.

  1. Go to Projects (Take me there).
  2. Select Employee hourly rate. This opens the hourly cost rate window.
  3. Find the employee and select Add. Or, to edit an employee's rate, select the pencil ✎ icon.
  4. Select the calculator icon to open the hourly cost rate calculator.
  5. Add your employee's hourly wage and employer taxes. Note: If your employee is hourly, QuickBooks fills in their hourly wage and employer taxes for you. If your employee is salaried, enter an hourly rate by dividing their annual wage (including employer taxes) by the number of weeks in a year. Then divide by the average hours worked per week.
  6. Enter any additional employer taxes, workers' comp, or overhead for even more accurate hourly costs.
  7. Select Add to close the calculator.
  8. Select Save to save the hourly cost rate for the employee.
  9. Repeat for each employee. Then select Done to close the hourly cost rates window.

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Step 4: Add project timesheets

Now that you've set up payroll expenses and/or hourly cost rates, you can add your employees' hours to your project.

Note: In order to allocate salaried expenses to a project, your salaried employees will also need to track their hours in timesheets.

If you're using the hourly cost rate to track your expenses, QuickBooks will calculate employees' labor costs using their timesheets that are tracked to your project. Keep in mind that hourly cost rates will only calculate costs on new timesheets going forward. Any timesheets that were made before the hourly cost rate was entered will not be calculated in the project overview or reports.

Here's how to add employee timesheets to a project.

Note: If you have QuickBooks Time, your workers can track time to the project. Then, you can approve and export the time to QuickBooks Online.

Tip: If you plan to invoice your customer for project hours, make sure you turn on billable expenses so you can create invoices from the timesheets.

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Step 5: View your labor costs

Now that you've set up payroll expenses and/or hourly cost rates and added employee timesheets, you can view your labor costs with either method.

Switch between viewing payroll expenses or hourly costs:

  1. Go to Projects (Take me there).
  2. Find and select the project you want to view.
  3. Select the Payroll Expenses or Hourly Costs dropdown ▼ and choose the one you want to view. Note: Changing this setting in one project will affect all projects.

If time charges aren't calculating like you expect in your project, check this switch to see if you're using your preferred type of labor cost (hourly costs or payroll expenses).

Note: While this switch will change which labor cost you see in your project's overview and the projects list, it won't affect your books.

Understanding project data and reports

The following views and reports will calculate labor costs based on either payroll expenses or hourly costs (depending on what the switch is set to):

  • The income and costs bar graph on the list of all projects
  • The income and costs bar graph above each tab within a project
  • Overview tab
  • Project Profitability report (within the Projects tab) and any project-related report outside of the Projects tab. Note: After opening these reports, you can customize them to use either hourly costs or payroll expenses in the Customize menu.

The following views and reports will only use hourly costs to calculate labor costs (even if you select payroll expenses on the switch):

  • Time Activity tab
  • Time Cost by Employee or Vendor report

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Step 6: Understanding project profitability

After your project is set up to track income, expenses, as well as timesheets and labor cost, you're ready to review your profits.

  • You'll see a snapshot of your income, costs, and profit margin in the header of every project page. This snapshot is based on either hourly costs or payroll expenses, depending on what the switch is set to.
  • You can get more details in the Overview tab. This is where you can see your labor costs separated from other project costs. These labor costs are calculated based on either hourly costs or payroll expenses, depending on what the switch is set to.
  • If you are tracking payroll expenses, you can run a Project profitability report from the Project reports tab to get an itemized view of your project accounts and transactions. This report only uses data from payroll expenses, so if you only track hourly time costs, this report won’t give you accurate information.

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