If you're running a small business, it's essential to understand the burden rate for your employees. This term refers to a calculation of all of the costs associated with employing someone, both direct and indirect.
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Knowing the burden rate can help you accurately figure out how much it costs to employ someone and better forecast your company's financials. In this blog post, we'll discuss how to calculate your burden rate and why it matters for your business.
What Is a Burden Rate?
Let's start with the basics. What is a burden rate, anyway?
The burden rate represents all of the costs associated with employing someone — including, but not limited to, salary (including overtime), benefits like health insurance and 401(k) contributions, and payroll taxes. This number is vital for business owners to know to accurately figure out how much it costs to employ someone. This number helps accounting and finance teams to better forecast future spending, aiding in business and strategy decisions.
How to Calculate Burden Rate
To calculate the burden rate, you must first total your indirect costs. The indirect costs are anything beyond an employee’s gross compensation. For example, indirect costs might include employment taxes, workers’ compensation, health insurance, and paid time off.
To get the burden rate, you will divide the indirect costs by the direct cost of payroll:
Burden Rate = Indirect Costs / Direct Payroll Costs
The burden rate is a dollar amount, which is the dollars of labor burden per one dollar of wages. For example, a burden rate of $0.40 means you spend $0.40 on indirect labor costs for every dollar of gross wages you pay.
Let’s say you pay an employee $50,000 per year. The annual payroll taxes and benefits associated with this employee total $15,000. To get the burden rate for this employee, divide the indirect costs by the direct costs:
$15,000 / $50,000 = $0.30
The burden rate is $0.30, meaning you pay $0.30 in indirect costs for every dollar of gross wages you pay the employee.
What Is the Average Burden Rate?
The average burden rate can vary by industry and also vary depending on the type of work employees are doing or whether they work full-time vs. part-time hours.
However, according to the U.S. Small Business Administration, the cost of an employee is typically 1.25 to 1.4 times the salary, depending on certain variables. For example, if you pay someone a salary of $35,000, your actual costs likely will range from $43,750 to $49,000, depending on where they live and what benefits you choose to offer.
Why Does the Burden Rate Matter?
Knowing the burden rate for your business is important for a few reasons. First, this rate allows you to make better business decisions. It will help develop answers to questions like: If you’re growing, how many full-time employees can you afford to hire within the next year? Perhaps you should outsource work to contractors or agencies rather than make an internal hire. Can you afford to start offering a new benefit like a 401(k) to your team?
Second, it's important to understand how this number impacts your bottom line. When you know what percentage of an employee's salary is going towards employment costs, you can better understand how much profit you're making on each sale. If you're not aware of the average burden rate for your industry, for instance, you could be over- or under-pricing your products and services. The burden rate can help to ensure your prices are in line with your competition.
That said, it's important to remember that the average burden rate is just that — an average. With so many variables at play, it's hard to compare your business to others. So, remember to calculate this number for your specific company and make sure you know your burden rate.
Knowing your burden rate and your industry's average burden rate is one of many factors that can help you with your business's financials. Another important tool in your toolkit is your tech stack. Having a great time tracking solution (like Justworks Hours) and a payroll platform that integrates with accounting software (like Justworks) can take a lot of admin work off your plate. Learn more about us today.
For more tips on optimizing pay for your employees, take a look at our other posts about compensation.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.