When you understand your labor burden, you can set prices that cover all your costs and still leave room for profit. This includes paying the right benefits, maintaining payroll records, and following wage laws. This is especially true if fewer jobs are estimated–overhead will be spread over a smaller number of jobs and make them appear less profitable overall. To stay ahead of the game, it’s better to focus on per-job project profitability instead of spreading costs across multiple jobs. By getting labor burden right, you’ll be setting the stage to gather data that you can use to improve your business.
Do labor burden rates change depending on where you hire within the same country?
Automated tools and software can increase accuracy and efficiency in payroll processing, project management, and customer relationship management. Although there’s an initial investment, the long-term savings and increase in productivity can significantly lower the fully burdened labor rate. Keeping on top of these costs helps contractors estimate accurately and bid competitively — while fairly compensating their workers and meeting all employer-related tax requirements.
How to calculate labor burden
It helps organizations make informed choices regarding projects, pricing, and resource management. Calculating the burden rate involves identifying and summing indirect and direct labor costs, then applying a straightforward formula. The general formula is (Total Indirect Costs / Total Direct Labor Costs) multiplied by 100 to express it as a percentage. This calculation indicates how much additional cost is incurred for every dollar of direct labor. The fully burdened labor rate is essentially the gross payroll labor cost + the labor burden cost.
How do you calculate the fully burdened labor rate?
SUI rates vary by state and are primarily employer-funded, depending on factors like industry and a business’s layoff history. Employer-paid payroll taxes form a significant portion of labor burden. These include contributions to Social Security and Medicare, collectively known as FICA taxes. For 2025, the employer’s share of Social Security tax is 6.2% on wages up to $176,100, while the Medicare tax is 1.45% on all wages, with no wage base limit. It includes benefits, taxes, and other expenses beyond the basic wages. For instance, offering a 401(k) with an employer match or providing comprehensive health insurance can greatly increase your total indirect costs.
When crafting an estimate, these additional costs must be added on top of an employee’s wage. Doing so will give a fully burdened labor rate, meaning we are factoring in the entire cost that an employee will incur. This enables a full picture of costs and allows for an accurate estimate that can be used to better plan for profitability. With Knowify, you can set up and apply fully burdened labor rates for each employee right from the get-go. If you need more time or want to recalculate, you can adjust your labor burden rates from the admin section at any time. We’ll help you every step of the way to ensure your labor is fully burdened and ready to go for better estimates and bids.
- In healthcare, the burden includes complex insurance and compliance costs, often pushing rates above 40%.
- Because when you’re building a distributed workforce, getting the numbers wrong doesn’t just impact this quarter’s budget—it can derail your entire growth strategy.
- This rate includes additional expenses such as workers’ compensation, insurance, benefits, and other related payroll taxes and costs.
Applying Labor Burden in Business
These indirect costs are integral to supporting productive work, even if not directly tied to a specific output. Labor burden includes indirect costs such as payroll tax, worker’s compensation costs, insurances, vacation, and other benefits. The total indirect cost, calculated as a percentage, of the direct labor costs.
Understanding the Mechanics of the Burden Rate
If the employer’s SUI rate is 2.5% on a $9,000 wage base, this would add $225. Overhead costs are expenses that keep the business running, like rent, electricity. If businesses don’t account for labor burden, they might underestimate their real expenses. For example, if an employee earns $20 per hour and takes a week of PTO, that’s $800 in overhead costs that need to be factored into your labor burden. The burden rate gives a clearer view of total costs than just payroll.
Unburdened labor cost refers to the gross wages paid to employees, excluding additional expenses. While these are voluntary, knowing your burden rate can help you determine if and how you can afford these benefits as an investment to attract and retain the talent you want to employ. Understanding the labor burden rate is fundamental for sound business management and strategic decision-making. This metric provides a realistic view of labor expenses, directly impacting a company’s financial health and competitive standing.
- From an operational standpoint, integrating labor burden into strategic planning helps in resource allocation and productivity analysis.
- Larger businesses may face extra mandatory costs like employee healthcare.
- If their hourly rate is $25, your actual cost is $37.50 per hour ($25 × 1.5).
- In Canada, provincial health premiums and workers’ compensation rates differ from province to province.
- Today, we’re going to step through what costs you should include in your labor burden rate, show you how to calculate a labor burden rate and how to leverage the burden rate when estimating.
Businesses can create more realistic budgets by accounting for the true cost of their workforce, anticipating future labor expenses more precisely. This detailed financial insight supports better resource allocation decisions, including determining optimal staffing levels, evaluating hiring needs, and structuring employee compensation packages. Employers also contribute to the Federal Unemployment Tax Act (FUTA) and State Unemployment Insurance (SUI). The FUTA tax rate is 6.0% on the first $7,000 of an employee’s wages, though most employers receive a credit reducing the effective rate to 0.6% if they pay state unemployment taxes on time.
Fully burdened rates help with broader budgeting efforts, providingclarity on where labor costs are going and how they relate to total overhead. From the perspective of the manufacturing industry, the labor burden is often higher due to the need for specialized skills, safety training, and compliance with stringent regulations. If you are a construction business that doesn’t have a good understanding of your true labor burden costs you are risking underestimating jobs and this will eat into your profits.
What is Burden Rate?
Further, any food or beverage offerings, wellness activities, training costs, lodging for business trips, and required uniforms may be added if the services are provided by the company. Meet with a Knowify expert today to see how you can capture your team’s expenses in real-time and tie them automatically to project budgets with our best-in-class job costing tools. As a business owner, you must keep tabs on these costs and factor them into your labor cost estimates. At the end of the day, accounting for labor burden is about capturing the full story of your business. Let’s break down how to calculate your real labor costs so you can plan, price, and grow with confidence. Welcome to labor burden—the gap between what you think you’re paying employees and what you’re paying.
Companies that embrace this approach can navigate the complexities of employee management with greater confidence and success. Human resources professionals might view the labor burden through the lens of employee retention and turnover. They understand that investing in employee development and well-being can lead to a more engaged and productive workforce, which, in turn, can reduce long-term labor burden costs. Check out our free online labor burden calculator to quickly estimate the labor burden rate for your employees. Your total labor burden definition labor burden for this employee would be $50,000 + $3,825 + $5,000 + $1,000 + $2,000. For example, if you pay 7.65% for Social Security and Medicare, multiply the gross pay by this percentage.