## What Is a Burden Rate?

The labor burden rate includes all of the costs associated with your employee, not just the cost of actual pay. Many small business owners underestimate how much it costs to maintain an employee on payroll and end up with bigger losses than expected. Before you consider hiring your first employees or new employees, calculate the fully loaded labor rate, including costs like benefits, employer-paid taxes, paid time off and overhead.

For instance, the starting salary for an associate in your shop might be \$30,000 per year, but it would be a mistake to conclude that this is the cost of employing him. After benefits, taxes, paid time off and overhead, you might have another \$20,000 of expenses associated with that employee each year. The extra costs might look something like this:

• Health costs: \$9,800
• Paid time off: \$2,500
• Professional development: \$2,400
• Payroll taxes: \$2,300

When those expenses are added together, the total of \$20,000 is considered the labor burden rate. To calculate the exact percentage of this burden, divide your additional expenses by the employee's annual salary. \$20,000/\$30,000 = .67 or a 67 percent burden rate for this employee.

## How Much Does an Employee Cost Per Hour?

An employee's cost per hour is more than her salary per hour. As shown above, an employee who costs a company \$20,000 per year on top of a \$30,000 salary actually costs \$50,000 per year and has a burden rate of 67 percent. If you calculate this employee's hourly rate by dividing her \$30,000 annual salary by 2,080 hours of possible work per year, it looks like the cost to employ this person is only \$14.42 per hour. However, when you take into account the burden rate and divide the full \$50,000 by 2,080 hours, the actual hourly expense for this employee is \$24.04. When you are a small business trying to stay afloat and increase profit margins, a \$10 per hour difference is a huge deal. By calculating the fully loaded labor cost per hour of every employee, you can avoid hiring more employees than your business can afford so that you can remain a reliable employer for the people you already have on staff.

## How Do You Calculate Employee Overhead?

While understanding the cost of benefits and taxes per employee could be pretty straightforward, calculating the overhead cost per employee can be a little bit more complicated. The overhead costs per employee include things like building costs, maintenance, property taxes, utilities, office equipment, office supplies and insurance. Once you calculate the overall total for your company, you divide it by the number of employees on staff. See this example for a company employing 43 people:

• Building costs: \$24,000
• Maintenance: \$10,000
• Property taxes: \$3,500
• Utilities: \$8,500
• Office equipment: \$7,000
• Office supplies: \$4,500
• Insurance: \$100,000
• Total: \$157,500
• Total per employee: \$3,663

Keep in mind that this number will vary by industry and company. Some industries will require safety gear for all employees, uniforms, special laboratories, operating rooms, manufacturing centers and more. Other businesses may completely eliminate categories like building costs, property taxes and maintenance, especially cyber companies that do not require central offices. The employee overhead total includes any costs that do not vary from employee to employee and are required to employ your workforce.

## Calculating Your Labor Burden Rate Accurately

Many small businesses do their own accounting when they are just starting out. Accuracy is important in every aspect of accounting and especially when calculating the costs of maintaining your workforce. If you miscalculate these numbers, you could end up having to lay off employees, or you could miss out on needed revenue to grow your business. Arriving at an accurate labor burden cost depends on having accurate records about how much you are paying each employee, the number of hours they work per period, tax expenses, insurance and overhead. Assuming your business keeps accurate records for each of these categories, several free online calculators are available.