Spending too much on recruitment, payroll or global HR?
Managing payroll is a significant part of employment. It affects many businesses with payroll involving the correct payment of employee salaries, tax contributions, insurance, and benefits. Each of these elements makes up what is known as the payroll burden.
These expenses must be accounted for to identity a true understanding of a company’s payroll spending. It can also influence profit levels, pricing, and overall business growth.
This help guide will provide you with an understanding of the payroll burden and advice on ways to optimize for sustainable business growth. This should help your company understand how to correctly manage payroll processes and learn the skill of accurately making payroll forecasts for the future.
What is Payroll Burden
Payroll burden is the total cost an employer must account for when taking on an employee.
This includes elements such as:
- Worker’s base wage/salary
- Employee benefits including annual leave, overtime compensation, pension allocations, etc.
- Taxes allocations
- Health insurance
Here’s an example. If an employee’s yearly salary is $50,000, but the employer is responsible for paying $15,000 in health insurance, payroll taxes, and employee benefits, the total payroll burden is $65,000, not $50,000.
Businesses need to think about all these costs to ensure they have a comprehensive representation of the cost of employing a worker. It is also crucial when making forecasts and targets for the future of a business.
Components of Payroll Burden
Payroll burden is made up of both direct and indirect costs that extend past an employee’s basic salary.
The key components that contribute towards payroll burden include:
- Healthcare: Some employers offer their workers private health insurance as a supplementary benefit. This is considered to be one of the largest contributors to the total payroll burden.
- Pension Contributions: Retirement and pension plans, such as 401(k), make up another large proportion of the payroll burden.
- Paid Time Off: Paid leave, sick leave, and maternity leave are part of the payroll burden. This is because employees must receive pay without working over these leave periods.
- Bonuses: Performance-based bonuses and profit-sharing bonuses must be allocated within the payroll burden.
- Uniforms, Travel Expenses, and Remote Work Stipends: Industries like healthcare, manufacturing, and hospitality must factor in expenses for uniforms. Other expenses include travel and remote work stipends.
Burden Rate Calculation
Calculating ‘burden rate’ can help employers understand the actual cost of employing their workforce. It can therefore assist companies in setting accurate budgets/forecasts in the future.
Follow the below steps to calculate the payroll burden rate:
1. Identify the Direct Payroll Costs
Direct payroll costs are the wages/salaries paid to your workers for the work hours they complete.
2. Determine the Indirect Labor Costs
Indirect labor costs are all other employment costs, including taxes, benefits, health insurance, training, and annual leave.
3. Add Direct Payroll Costs and Indirect Labor Costs
Combine both the direct and indirect labor costs to find out the total cost of the payroll burden.
4. Calculate the Burden Rate
The burden rate tells you the proportion of costs relative to direct wages.
The formula you need to follow is the indirect labor costs divided by the direct payroll costs.
Here’s an example to follow:
| Category | Amount |
| Direct Payroll Costs | $90,000 |
| Indirect Labor Costs | $30,000 |
| Total Labor Cost | $120,000 |
| Burden Rate | 33% |
This means that for every $1 paid to an employee in wages, an extra $0.33 must be allocated for indirect costs.
You can also use RemotePad’s global payroll calculator to better understand your payroll calculations.
Direct and Indirect Payroll Costs
Payroll burden is made up of both direct and indirect costs, and it’s important to understand both when correctly calculating the real payroll burden.
Direct costs are the wages and salaries of employees.
Indirect costs, however, are additional expenses associated with employment, such as:
- Inventory: Office equipment and administraetive supplies.
- Uniforms: Industries requiring uniforms, and the costs of acquiring and maintaining said uniforms, must pay for these as an indirect cost.
- Onboarding: Training or integration costs associated with onboarding new workers.
Payroll Tax Overview
It’s important to take into account taxes when calculating the payroll burden.
Employers are required to make contributions towards federal, state, and local tax programs on behalf of their employees. These may include:
- Social Security Contributions: Employers are required to make contributions towards social security programs to fund pensions, sick leave, and maternity arrangements.
- Federal Unemployment Tax: Unemployment tax is paid to federal employees to ensure workers receive a basic income if they find themselves without work.
- State Unemployment Tax: State-level unemployment insurance is unemployment tax for employees working for the state.
- Workers’ Compensation Insurance: This provides coverage to employees who are suffering from a work-related injury and are thus unable to work.
Employee Benefits and Additional Expenses
Employee benefits can have a major impact the payroll burden.
While these benefits are often mandatory by labor laws and help increase employment and retention rates, they still need to be factored into the payroll burden.
1. Insurance Related Expenses
Some employers provide their workers with health, dental, or life insurance as a supplementary benefit.
These policies can make up a large portion of the payroll burden as they tend to be costly. This is particularly prevalent if employers offer additional insurances, such as vision or disability insurance.
2. Statutory Benefits
Mandatory benefits required by local labor laws, including annual leave or overtime compensation, are another major factor when determining payroll burden.
These will vary depending on the country and its individual jurisdiction.
3. Miscellaneous Expenses
This category includes smaller costs that may be overlooked, such as training material, company events, company vehicles, or travel expenses.
While these costs aren’t related to an employee’s salary, they will make up more of the overall costs of hiring a new worker.
4. Bonus and Deductions
Performance bonuses help to motivate employees and increase the overall retention rate, but they must be accounted for within the payroll burden.
In contrast, deductions such as loan repayments and benefit cost-sharing can help to offset the total cost of the payroll burden.
Specific Payroll Considerations
It’s important to bear in mind that specific workforce arrangements come with different implications for the payroll burden.
We’ve detailed these in the sections below:
1. Temporary Staff
Employing staff temporarily can reduce the long-term payroll burden.
However, employers must understand that temporary workers may be subject to different taxes. For example, in California, the unemployment insurance rate can range from 3.4% – 6.2% depending on the length of time an employee has worked in a business.
It’s therefore important for businesses to balance flexibility with additional costs.
2. Independent Contractors
Independent contractors are not generally included within the payroll burden, as they are not eligible for employee benefits, and the employer is not responsible for their tax allocations.
However, employers must provide independent workers with a Form 1099-NEC to any worker that was paid $600 or more throughout he relevant tax year to ensure earnings and taxes are allocated correctly.
3. Paid Leave
Some types of paid leave must be managed as part of payroll, such as sick leave, paid family leave, and annual leave.
These costs can impact productivity, with salaries being paid when workers are not present.
Impact on Company Profitability
Payroll burden directly impacts company profitability, with high labor costs eating into margins and limiting future profitability.
Understanding payroll burden can help companies better understand the real level of their profitability, and help them to make changes that can improve profit, such as restructuring employee benefits or negotiating better insurance rates.
Understanding Labor Burden
Labor burden is similar to the payroll burden, but focuses more directly on costs related to employing workers.
The main elements of labor burden include:
- Payroll Taxes: All mandatory contributions such as social security, healthcare, and unemployment insurance.
- Insurance: Employer-paid health or life insurance.
- Paid Time Off: Annual leave, sick leave, or maternity leave.
- Training and Development: All additional training costs associated with hiring a new staff member.
- Retirement Plans: The contributions employers make towards pension plans.
Compliance and Liability Issues
Employers must comply with local labor laws to avoid any ongoing legal issues. Typical compliance problems often come misclassifying contractors, underpaying entitled benefits, or incorrect allocating taxes/social insurance contributions.
Employers should ensure their practices are compliant with the following to ensure strict compliance:
- Federal/state laws
- Tax regulations
- Benefit requirements
- Wage and hour laws
Optimizing Payroll Burden
Improving the payroll burden can be done in many different ways to ensure that employers balance profitability with employee satisfaction.
Some key ways to optimize the payroll burden include:
- Automation: Companies can use automation tools tohelp to minimize errors and make processes more efficient.
- Encourage remote/hybrid working: Onboarding remote employees can significantly reduce overhead costs.
- Partner with a PEO: A Professional Employer Organization (PEO) can help businesses outsource payroll. This can help to access the best rates for employee benefits, saving money and optimizing the payroll burden.
- Regularly monitor processes: Employers should use data analytics to regularly track payroll costs. This aids forecasts and predictions and optimizing the process in the future.
Global Overview of Payroll Burden
Payroll burden can vary globally, with different countries adhering to a range of labor laws, tax systems, and social security requirements.
Here are some examples of how major parts of the world fare in terms of payroll burden, depending on benefits and industry:
| Area | Average Payroll Burden |
| United States | 25% – 40% |
| Europe | 50% – 60% |
Countries could consider outsourcing responsibilities to an Employer of Record or PEO provider. This can help global payroll, with the support of a company that fully understands the payroll rules and labor laws in the country they’re hiring in.
The best payroll outsourcing companies and services should be carefully considered. This will ensure that payroll is handled correctly and compliantly. It will in turn help to reduce the overall payroll burden while maintaining employee satisfaction.
The method for calculating the payroll burden rates is the total payroll burden costs (including taxes, benefits, and insurance) divided by an employee’s gross salary.
This will provide the payroll burden rate as a percentage, providing a ratio of indirect costs to the overall salary.
The construction industry identifies the indirect costs of employing a worker, such as work compensation, payroll taxes, and employee benefits, and then divides this total by the number of labor hours worked.
This will provide the payroll burden as an average burden rate per hour.
The difference between labor burden and overheads is that labor burden refers to indirect costs related to employing a worker (payroll taxes, benefits, and health insurance), while overheads refer to operating expenses such as rent, utilities, and office supplies.
