Quick answer
Most small businesses spend roughly 20% to 45% of revenue on wages, depending on the industry. A fixed percentage is only a guide. The real limit is your gross margin: wages are affordable while gross profit, minus wages, rent and other overheads, still leaves the profit you need. A new hire pays off when the extra gross profit they unlock covers their full cost.
Key points
- Wage ratio = total labour cost (wages, super, workers comp, contractors) ÷ revenue. Use the same definition every month.
- The ATO's published benchmarks show labour at roughly 18% to 35% of turnover for restaurants and coffee shops, and up to 44% for hairdressers.
- Your ceiling is gross margin minus overheads minus target profit. A rule of thumb can't see your margin; that formula can.
- A hire breaks even on sales = full yearly cost ÷ gross margin. Holding the ratio steady needs far more: yearly cost ÷ the ratio.
- Award rates rose 4.75% from the first full pay period on or after 1 July 2026, so a ratio that was comfortable last June has moved.
- Fund the cash trough before the hire pays back, not the whole salary.
Most small businesses spend somewhere between 20% and 45% of revenue on wages, but the percentage that’s safe for you depends on your gross margin. Wages are affordable while gross profit, minus wages, rent and other overheads, still leaves the profit you need. A new hire is safe when the extra gross profit they unlock covers their full cost, with a cash runway to get there.
That makes the wage ratio a launch-pad check, not a speed limit. Do the maths before the job ad goes up and the next hire becomes a decision, not a hope.
How do you calculate wages as a percentage of revenue?
One line:
Wage ratio = total labour cost ÷ revenue (ex GST) × 100
The trap is what goes in the top line. Count all of it:
- gross wages and salaries, including casuals and overtime;
- super at the 12% guarantee rate, which the ATO sets out on its how much super to pay page;
- workers compensation premiums, and payroll tax if you’re over your state’s threshold;
- contractors who work like staff, such as a regular subbie covering the roster.
Leave out your own drawings if you’re a sole trader or partner. Include a market-rate wage for yourself if you work in the business, because a ratio flattered by an unpaid owner collapses the day you step back. Calculate it monthly and over a rolling 12 months, so one big week doesn’t fool you.
What do the ATO benchmarks say about wages by industry?
The ATO publishes small business benchmarks for around 100 industries. They show a labour-to-turnover range for each of three turnover bands, drawn from real tax returns. Their labour measure covers salary, wages and contractor payments, and leaves out amounts paid to associated parties such as the owner’s own labour. Three examples, from the ATO’s published pages:
| Industry | Labour as a % of turnover (range across turnover bands) |
|---|---|
| Restaurants | about 18% to 34% |
| Coffee shops | about 21% to 35% |
| Hairdressers | about 23% to 44% |
The ranges are wide even inside one industry, so “about 30%” is never an answer. Where you sit depends on your turnover band, your trading hours and whether you do your own prep or buy it in.
Look up your own industry on the ATO’s page, using the same definition of labour as above. If you sit above the top of your range, you have a pricing, rostering or sales problem to fix before you add a person. If you sit below the bottom, you may be under-staffed and leaving sales on the table.
What’s the wage ceiling for your business?
Industry ranges tell you where you sit. Your own margin tells you how far you can go:
Wage ceiling = gross margin % − overheads % (rent, insurance, software and so on) − target profit %
Here it is for three illustrative businesses:
| Retailer | Café | Professional practice | |
|---|---|---|---|
| Gross margin | 38% | 68% | 85% |
| Overheads (rent and other) | 14% | 22% | 20% |
| Target profit | 8% | 10% | 15% |
| Wage ceiling | 16% | 36% | 50% |
The retailer who copies a café’s wage ratio goes broke. The practice that panics at 45% is leaving growth on the table. If you’re unsure of your true margin, our gross margin and growth page shows how to find it, and the same lens drives the new hire break-even method.
A worked example (illustrative)
A Brisbane café turns over $1,200,000 a year. Cost of goods is 32%, so gross profit is $816,000 (68%).
| Line | Per year | % of revenue |
|---|---|---|
| Revenue | $1,200,000 | 100% |
| Gross profit | $816,000 | 68% |
| Labour (wages, super, workers comp) | $408,000 | 34% |
| Rent | $120,000 | 10% |
| Other overheads | $150,000 | 12.5% |
| Profit | $138,000 | 11.5% |
The owner wants to add a full-time team member to open a second coffee window and a lunch trade. Fully loaded, the hire costs:
| Cost | Per year |
|---|---|
| Base wage | $62,000 |
| Super at 12% | $7,440 |
| Workers compensation | $1,500 |
| Uniform and training | $1,060 |
| Total | $72,000 ($6,000 a month) |
Break-even sales. $72,000 ÷ 0.68 = about $105,900 of extra sales a year, around $8,800 a month. That’s a 9% lift on current sales.
To hold the wage ratio at 34%. $72,000 ÷ 0.34 = about $211,800 a year. That’s a 17.6% lift. The hire can be a good decision and still push the ratio up. If the extra sales are $150,000, gross profit rises by $102,000, profit by $30,000, but the ratio moves to $480,000 ÷ $1,350,000 = 35.6%. Judge the hire on profit and payback, and treat the ratio as a smoke alarm.
The ramp. New trade takes time. The owner expects extra monthly sales of $4,000, $6,000 and $8,000 in months one to three, $10,000 in months four to six, then $12,500 a month. Add a $3,000 one-off cost for recruitment and training in month one.
| Month | Extra sales | Gross profit (68%) | Monthly result after $6,000 cost | Running total (incl. $3,000 setup) |
|---|---|---|---|---|
| 1 | $4,000 | $2,720 | –$3,280 | –$6,280 |
| 2 | $6,000 | $4,080 | –$1,920 | –$8,200 |
| 3 | $8,000 | $5,440 | –$560 | –$8,760 |
| 4 | $10,000 | $6,800 | +$800 | –$7,960 |
| 5 | $10,000 | $6,800 | +$800 | –$7,160 |
| 6 | $10,000 | $6,800 | +$800 | –$6,360 |
| 7 | $12,500 | $8,500 | +$2,500 | –$3,860 |
| 8 | $12,500 | $8,500 | +$2,500 | –$1,360 |
| 9 | $12,500 | $8,500 | +$2,500 | +$1,140 |
The deepest point is –$8,760 in month three. The owner sizes a $10,000 line of credit to cover it, and puts the total cost of finance at $900 in dollars. Payback lands in month nine: +$1,140 less $900 leaves +$240. It’s thin, so the owner checks it in the Growth ROI calculator and runs a slower ramp.
The stress test. If the extra sales settle at $8,800 a month instead of $12,500, gross profit is about $5,984 against a $6,000 cost. The hire stops losing money but never repays the trough. That’s the real risk on the table, and it’s visible before anyone signs a contract.
Curious whether your own plan holds up? You can check what funding might fit a hire like this in about a minute.
What has changed for wage budgets since 1 July 2026?
Three things moved the denominator and the numerator for most employers:
- Award rates are up 4.75%. The Fair Work Ombudsman confirmed the increase to minimum and award wages in its 1 July 2026 release; it applies from your first full pay period on or after 1 July. On an award-based wage bill with flat sales, a 34% ratio becomes about 35.6%. Prices need to follow, or the ratio simply creeps.
- Super arrives faster. Under Payday Super, super is now due within seven business days of payday, not quarterly. The cost is the same 12%; the cash leaves the account sooner. A new hire’s super hits your bank balance in the first month, not a quarter later.
- Casual loading counts. If you’re filling hours with casuals, the 25% loading belongs in your labour figure, even though it replaces leave you don’t accrue.
None of these change the method. They change the inputs, so redo the ceiling with this year’s numbers.
When is it actually safe to hire?
Run four checks before the next job ad:
- Ceiling. After the hire’s full cost, is the wage ratio still under your ceiling, not just industry average?
- Break-even sales. Do you already have the work, or believable demand, for the extra sales the hire needs? Quote requests you can’t serve, rostered overtime and a waiting list are all evidence.
- Low-case test. If extra sales only reach 70% of plan, can the business carry the loss?
- Cash trough. Can you fund the deepest point of the cumulative shortfall? If not, that’s the funding need, not the annual salary.
Our signs you’re ready to hire guide covers the demand signals, and borrowing to hire a salesperson shows the same maths for a role whose output takes longest to arrive. Overtime and casual cover often cost more per hour than a permanent hire, so compare them before you decide not to hire.
Should you borrow to fund the ramp-up, or wait?
Borrowing makes sense when the numbers above hold up and the money is covering timing: wages and super that go out before extra sales come in. A line of credit for growth suits this well, because you draw month by month and pay it down as the sales land. Our hiring staff finance playbook lists the other routes.
Waiting is wiser when the ratio is already above your ceiling, when the extra sales are a hope rather than a pipeline, or when the loan would be propping up existing losses rather than funding a clear lift.
Ready to add to the crew? Let’s see what fits
Hiring someone is the moment a business stops being a one-person stretch and starts to scale. The only real risk is the stretch between the first pay run and the first month the extra sales cover it, and that’s a gap you can size and fund before you start.
If your numbers say the next hire pays back, a quick enquiry shows what funding could cover the runway. It takes about 60 seconds, and your credit file stays untouched just for asking. We don’t scatter your details across a pile of lenders, so there’s no flood of calls afterwards. A real person on our team reads your turnover, margin and hiring plan, then rings you to talk it through. Please fill the form in accurately, since honest figures help us match the right option the first time.
Frequently asked questions
What percentage of revenue should go on wages?
There's no single right answer. The ATO's small business benchmarks put labour at about 18% to 34% of turnover for restaurants, 21% to 35% for coffee shops and 23% to 44% for hairdressers, depending on turnover band. Your own ceiling is gross margin minus overheads minus the profit you want. If that leaves 36% for wages, 36% is your limit, whatever the industry average says.
Does the wage ratio include super and workers compensation?
It should. Count wages, the 12% super guarantee, workers compensation, payroll tax if you pay it, and payments to contractors who work like staff. The ATO's benchmark labour figure covers salary, wages and contractor payments but leaves out amounts paid to associated parties such as the owner's own labour, so check which definition you're comparing against.
How much extra revenue does a new employee need to bring in?
To break even, divide their full yearly cost by your gross margin. A $72,000 all-in hire at a 68% margin needs about $105,900 of extra sales a year. To keep your wage ratio unchanged you'd need their cost divided by the ratio, which at 34% is about $211,800. The first figure decides whether the hire loses money. The second shows how much your ratio will drift if sales don't follow.
Is a high wage percentage always a problem?
No. A business with a high gross margin, such as a clinic or professional practice, can carry a wage ratio above 50% and still make a healthy profit. A low-margin retailer can't. A high ratio is a problem when gross profit, minus wages and overheads, leaves too little profit or too little cash.
Did the 1 July 2026 award increase change my wage ratio?
If your staff are paid at award rates, yes. The Fair Work Commission lifted modern award minimum rates by 4.75% from the first full pay period on or after 1 July 2026. With sales and everything else unchanged, a 34% wage ratio on award wages becomes about 35.6%. Check your rosters and prices against the new rates.
Can I borrow to cover wages while a new hire ramps up?
Yes, hiring is a legitimate business purpose. Unsecured and line-of-credit options, typically $5,000 to $500,000 and sized on turnover and bank statements, can cover the months before the extra sales arrive. Size the amount to the deepest point of the cumulative shortfall plus a buffer, not to a full year of salary.
How often should I check my wage percentage?
Monthly, using the same definition each time, and always before you advertise a role. Watch the trend as well as the number: a ratio that creeps up two points over a quarter is an early warning that pricing, rostering or sales has slipped.