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solarken
February 5, 2021
Question

Allocating labor cost of business owner when calculating and reporting Job cost and profit

  • February 5, 2021
  • 2 replies
  • 0 views

Hello,

I understand how to allocate equipment purchases and checks received as income to a specific job that my contracting business completes, but I do not see an easy way to break out the hourly labor cost for me as the owner of the business, from the gross profit from the job. Even though I do not pay myself as an employee,i.e. with a weekly check based on my hourly labor, and I just flow through the profit on my tax return via Schedule C, I would like to know and track how much was truly net profit and how much was due to my labor on each job. Can someone explain how to do this? 

 

I saw a previous post that suggested to creat an expense account "Owners Job Cost Allocation" and an item "Owner's time", and then write a zero dollar check and put a negative number into the Cost field for the expense, and an offsetting positive number in the Cost field for the item to do this, but when I tried it, the Job Profit & Loss Report just shows 0.00 for the Owner's Job Cost allocation and does not reduce the profit by the cost of my labor.

 

Thank you.

2 replies

BigRedConsulting
BigRedConsulting
February 5, 2021

As a sole-proprietor owner, your time is not a cost to the company - to you - so actually entering a cost in order to see it on financial reports is inappropriate.  For the same reason you cannot donate your time and write it off as a donation, because it has no value (sorry.)

Still, you could use the Time tracking feature in QB to record your time, just so you know where you're spending it.  And then outside of QuickBooks you could mock up a report based on what you think your time is worth.

S
solarkenAuthor
February 6, 2021

I did not ask the question so I could do something that goes against IRS or federal tax rules.  I understand I need to report my income in a certain way as an LLC to the IRS, and I have no problem complying with that. With all due respect, what is appropriate in how I want to report on so that I feel my company is more or less successful is up to me, not anyone else.  My time DOES have value, and really is the one of the few things that cannot be replaced in the operation of my business.

 

The benefit of understanding Job Profitabiity while accounting for my time as the owner of a single member LLC spent on that project, is to better understand the drivers for and make better decisions to achieve increased profitability.  Without allocating a value to my time, it can greatly affect the profit. For example, suppose I spend 100 hours to complete Project XYZ, but only 20 hours to complete Project ABC, and the value of my time is $50/hr.  And suppose the QB P&L for the jobs shows $6,000 profit for XYZ, and $3,000 profit for ABC. Now suppose for simplicity that the total cost I charged the customer for each project was $50,000.  By looking at the QB P&L, I would see a 12% profit for XYZ, and only a 6% profit for ABC, and so may conclude that the XYZ project was more profitable and so I should try to replicate everything I did in XYZ in future projects vs how they were done in ABC.  But, if I include the cost of my time, then the P&L (w/owner allocation) Reports for each job would show $6,000 - $50 x 100 = $1,000, for XYZ, and $3,000 - $50 x 20 = $2,000 for ABC. This changes the picture completely, with ABC profit that is twice that of XYZ. After looking at these reports, I might see that the reason ABC was more profitable was because I used a subcontractor for a portion of the work which helped reduce my time on the project, which might give me insight into how better to plan future projects for maximum profitability, and how it might free up my time to work on other things, like sales. With accurate reporting, along with good forecasting, I could better determine how overall profit might be impacted by where I spend my time vs hire employees or subcontractors.

 

As I stated in my original post I did see a solution in a different post.  I went back and played around with the zero dollar "write checks" entry and I found that if I made the Expense entry a positive amount, and the Item side enty a negative amount, and had the job name selected in the field for both sides of the entry, I got a 0.00 cost in the Job P&L report, so therefore no change in reporting from the standard job profitability report. But if I removed the Job name from the Item side, so that the job name is only apled to the expense, then the report did allocate my time as an expense on the report, effectively lowering the profit and giving me the info I needed.

 

If there is a better way to do this, I would like to hear it. I don't know whether there is some negative impact that would show up on some other report, of having the Item side not include the Job name, but this seems to work in allocating the cost of owner time to a job.

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userl-johnson
May 6, 2021

Hi Solarken,

 

I have the exact same question. I think I may have found the same post you referred to with the negative expense and found that I had the same issue (it zero's out on the project level report). I'm also worried about removing the class from just the item side....have you found a workaround to this?

RhondaRosandCPA
RhondaRosandCPA
July 2, 2023

QuickBooks Tip: Applying Owner’s Time for Job Costing

Job costing is important to contractors, builders and many other types of small businesses such as plumbers, electricians, architects, landscapers, wedding planners, caterers and many others.  When the business is a sole proprietor (or an LLC taxed as a sole proprietor), then the owner takes an Owner’s Draw instead of a paycheck.  Thus, you cannot allocate the owner’s time to jobs via payroll.  Instead, you can create a zero-dollar check to allocate the owner’s time (i.e. cost) to the job as follows:

  1. Create an expense account called Owner’s Job Cost Allocation (this account should zero out so there is no impact on the Profit and Loss).
  2. Create a two-sided service item (by checking the box that says this service is performed by a subcontractor or partner) for the owner’s time which is mapped to the Job Cost Allocation expense account created in step 1.
  3. Enter a Zero Dollar Check to the owner
    • On the items tab, allocate the owner’s time to the jobs as appropriate using the item(s) created in Step 2 and the customer:job.
    • On the expenses tab, enter a negative amount for the total to the Job Cost Allocation account.
 

 

 

The job profitability reports will include the expense but there is no impact on the Profit & Loss report (the job cost allocation expense account zeroes out).  Voila — quick and easy to get the reporting information needed to monitor job profitability.

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