Key Takeaways
1. Aside from the direct costs of employing their staff, businesses also incur indirect costs which they should understand and include in their calculations to arrive at a full picture of the cost of hiring and retaining their employees.
2. The payroll burden for a business is the total cost to an employer for hiring an employee and includes indirect costs above and beyond their gross salary and payroll costs.
3. Many of the costs associated with payroll burden are mandated by the government, such as unemployment taxes, payroll tax and social security deductions. Other costs, such as contributions to pension plans may be optional.
4. Insight into its payroll burden can help a business with strategic decision-making, achieving higher profit margins as well as staying competitive.
5. The payroll burden rate provides an accurate dollar figure from which a business can derive the true cost of its labor.
The payroll burden is an important figure for a business to understand and refers to the actual cost to a company for hiring an employee, taking into account costs beyond just their salary. In this sense, it is the financial burden a company bears for hiring an employee.
Often, businesses view these costs as overheads failing to include them in the entire computation related to employment costs. It is important, therefore, for a business to have a firm grasp on its payroll burden as it provides insight into the total cost required to hire and maintain its global workforce.
A greater understanding of the total costs of doing business can also help an organization to remain competitive by helping it decide where to operate, thereby influencing its overall growth and profitability.
What Is Payroll Burden?
The definition of payroll burden, also known as labor burden, is the total cost to an employer for hiring an employee, and includes indirect costs above and beyond their gross salary and payroll costs.
Payroll burden definition typically consists of costs such as healthcare, pension contributions, payroll taxes (such as FICA taxes), uniforms, travel expenses, paid time off, bonuses and other fringe benefits that a company chooses to pay for its employees.
Payroll burden costs will differ depending on the nature of the business and the particular terms offered by the employer but may include other benefits such as training, catering, company cars, laptops, cellphones and gym memberships.
The indirect costs associated with hiring an employee are added to their gross wages to determine the total cost of labor for the employee. Payroll burden, therefore, provides an employer with a clearer indication of the costs they need to cover when hiring an employee giving them a more accurate view of the profitability of their business and ability to hire new staff.
The burden rate is the dollar amount spent or applied to every dollar paid in wages. For example, a burden rate of $1 means that a business is spending one dollar on top of every dollar paid in wages. The burden rate can give an accurate view into the profitability of a business as it provides an insight into the hidden or true cost of maintaining an employee.
Payroll burden is similar to the total cost of hiring an employee, but depending on the calculation method, cost of hire may include a greater proportion of overheads.
Why Does Payroll Burden Matter?
A business will struggle to remain competitive and profitable without having a clear indication of its total workforce expenditure. Understanding its payroll burden is prudent for every organization and will inform decisions such as where it chooses to do business.
The location of a business can have a great bearing on the cost it will incur in relation to employment. For instance, certain countries or states may require additional job training or have higher mandatory payroll taxes or social security contributions for employees. By calculating these costs in terms of its payroll burden, a business can determine which regions are more cost-effective when it comes to hiring and retaining labor.
Factors such as the cost of living, average wage and statutory pay requirements can inform a business regarding some of the indirect costs associated with keeping an employee beyond their salary, and provide a more accurate picture of the true cost of operating and doing business in that region.
Another area in which an understanding of its payroll burden can help a business is when deciding whether to hire temporary staff. For example, a business will incur costs for paid leave in the form of holidays, sickness or medical leave and vacation leave: Many businesses pay their employees 10 holidays a year plus one or two weeks of additional vacation leave. All of this time qualifies as paid time off and, therefore, comes out of the employer’s pockets. When employees are using their paid leave an employer may be short-staffed and need to hire staff on a temporary basis. All of these additional expenses will become part of the company’s payroll burden.
Essentially, the payroll burden can help an employer understand the true cost of its employees and whether it can afford to offer them certain benefits or take on more staff.
How Is Payroll Burden Calculated?
The payroll burden is expressed as a rate and consists of the total indirect costs of hiring an employee as a percentage of the direct costs. Put another way, the burden rate can be said to be a way of comparing direct and indirect costs.
To calculate the burden rate, you must first add up your indirect costs associated with employing someone. These costs are anything over and above the employee’s gross compensation and may include employment taxes, health insurance (whether employer-provided, or PEO-provided insurance), retirement contributions and paid time off.
To get the payroll burden rate, indirect costs are divided by the direct costs as follows:
Payroll Burden Rate = Indirect Costs/Direct Costs x 100
The burden rate is expressed as a dollar amount, which equates to the dollar burden or spend, for one dollar paid in wages. A burden rate of $0.50 means the indirect cost of labor is $0.50 for each dollar paid in gross wages.
For example, if an employee is paid $50,000 per year and the indirect costs of payroll taxes and other mandatory payments and benefits to the employer total $10,000 the burden rate will be calculated as follows:
$10,000 / $50,000 x 100 = $0.20
The burden rate is $0.20 which means the employer pays $0.20 in indirect costs for each dollar it pays in gross wages to that employee.
To find out more about the kinds of costs that are included in labor burden, check out What Are Payroll Deductions?
Video — Payroll Burden Calculator
Let Horizons Manage Your Global Payroll Burden
Horizons manages payroll on behalf of companies in more than 180 countries and regions. Our ability to centralize and coordinate global payroll cycles can help you to streamline your payroll, ensuring accurate and on-time payments as well as full compliance with local laws for all of your international employees.
Contact us today to find out more about our Global Payroll Outsourcing.
Frequently asked questions
The burden cost to an employer of hiring and retaining its workforce is calculated by dividing the total indirect costs of employment by the direct costs of payroll.
Burden Cost = Indirect Costs/Direct Costs x 100
Some of the indirect costs can include the following:
- Payroll taxes
- Social security and health insurance
- Paid leave for sickness, statutory holidays and vacations
- Pension contributions
- Bonuses
- Travel expenses
- Training
The burden cost, which is expressed as a dollar amount, represents the dollar burden per one dollar paid in wages.
For example, an employee that is paid a gross salary of $40,000 per year with indirect costs of $10,000 per year will have a burden cost of $0.25.
$10,000/$40,000 x 100 = $0.25
A burden cost of $0.25 means the employer spends $0.25 on indirect labor costs for every dollar it pays in gross wages.
An organization needs to consider the entire cost related to running its business in order to determine its profitability.
Burden in business refers to the hidden or indirect costs a company pays as part of its operations and is effectively the real cost of doing business. Calculating the burden rate of a business is important for determining its profit margins and to help it remain competitive in the marketplace.
The burden for most businesses is the hidden labor and inventory costs companies pay as part of providing their goods or services to customers, giving them a more accurate picture of the true cost of such provision.
