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What Is Labor Burden? How To Calculate Your True Payroll Costs

By August 30, 2022September 26th, 2022No Comments
Woman at a coffee shop on her laptop with tax paperwork on the desk

Labor burden — also called payroll burden — is the amount you pay your employees, including their paycheck and any additional benefits that you’re responsible for. These additional costs include things like insurance, paid time off, remote work stipends, bonuses, or any other expense.

Knowing your labor burden rate makes you a more informed business owner. Calculating your labor burden in a way you can trust is crucial for understanding your true costs and your business’s profitability. We’ve put together a guide to calculating yours.

What Is Included in Payroll Burden? 

Payroll burden will include any and all expenses you pay to keep your employees — from their paycheck to their benefits. These direct and indirect costs give you a picture of the true cost of your workforce.

Payroll burden percentage includes:

  • Payroll taxes
  • Paid time off
  • Retirement benefits
  • Health insurance

Why Should I Know My Labor Burden Rate?

Your employee’s salary alone doesn’t give you the full picture of how much they’re costing your company. Your labor burden rate helps you be more informed about the true costs of your employees, including fluctuations in health insurance, benefits, and other voluntary costs.

Knowing this metric helps you make more informed decisions about which benefits you can realistically afford, whether or not you can onboard more employees, and where you can cut costs.

Examining labor burden rates on a global scale can also help you hire abroad. Average labor burden rates vary from country to country, so seeing how yours stacks up to other countries helps you make the decision to look globally or keep your employees closer to home.

Labor Taxes Across the Globe

Payroll taxes vary across the globe — for example, Belgium’s labor taxes are 5,260% more than those in Colombia.

Combining income tax and social security contributions from both employer and employee, here are how some of the countries stack up, according to the OECD:

How Do Labor Taxes Vary Across the Globe?

 

USA 28%
Japan33%
Norway36%
Colombia 0%
France47%
Belgium53%
Australia27%
Mexico20%
Turkey40%
United Kingdom31%

Information on this page was last updated as of May 24, 2022 and is subject to change. Velocity Global makes no representations as to the accuracy or completeness of the information on this page.

How To Calculate Labor Burden Rate 

Simply put, your labor burden rate is your indirect employee costs divided by your direct payroll costs. Let’s break down each part of this equation.

1. Determine Employee’s Gross Pay

Gross pay is the amount you pay in wages before any deductions like tax, 401K, or insurance rates are taken out. Simply put, your employee’s gross pay is just their salary or hourly rate.

For hourly employees, you’d calculate gross pay by multiplying the hours your employee works per week by their hourly rate and then the number of weeks they work per year.

2. Calculate the Cost of Taxes

Employers will need to calculate the cost of taxes they’ll need to pay on their employees’ wages. The employee will pay their own portion from their wage, and you’ll foot the bill for the employer percentage.

In the U.S., these taxes are often broken down like this:

  • Federal Insurance Contributions Act (FICA). These taxes often include Social Security and Medicare.
  • Federal Unemployment Tax Act (FUTA). Employers pay 6% federal unemployment tax on the first $7,000 they pay their employees during the calendar year.
  • State Unemployment Tax Act (FUTA). This is usually an employer-only tax with a rate that varies from state to state.

3. Calculate Any Other Voluntary Payments 

Some employers take on additional payments by providing benefits to their employees. While these may attract quality talent to your organization, they also up your labor costs.

Some benefits employees may provide include:

  • Paid time off
  • 401K matching
  • Employer-paid insurance

Add up any benefits you provide and include them in your indirect labor costs.

4. Total the Individual Percentage 

To get your payroll burden rate, you’ll use the following formula:

  • (Indirect employee costs/ direct payment costs) x 100

Indirect payment costs are the costs found in steps two and three above — taxes, insurance, and benefits. Direct payment cost is your employee’s gross wage.

For example, say you pay an employee $60,000 per year. You also pay an additional $8,000 when you factor in taxes, insurance, and benefits. That means you’d divide $60,000 by $8,000 and multiply by 100 to get your payroll burden percentage, which would be 13%.

Calculate Accurate Payroll Costs

For global companies, compliance is key when it comes to hiring and paying your employees. But being aware of exactly how much labor is going to cost you in various parts of the globe can also make or break your company — for example, taxes, benefits, and wages are vastly different in Tokyo vs France.

That’s where a compliance partner comes in. Contact us to see how we can help you stay informed about your labor expenses.

Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information – and your interpretation of it – is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information are hereby expressly disclaimed. All content is provided “as is” and Velocity Global makes no representations or warranties concerning this information.