Labor Burden vs. Overhead Expense

Your labor burden is the full cost you incur for employees. Overhead expenses are the fixed or indirect costs of running your business, such as administrative and marketing costs. Unlike labor burden, overhead expenses are not directly tied to the level of your production.

Your labor burden is your payroll expense that goes beyond what you pay your workers. It includes your hidden expenses associated with the employee’s job. Overhead expenses, however, are called operating costs and involve the indirect expenses needed to operate your business. Labor burden is usually easier to determine than overhead costs.

Knowing your labor burden rate is important during budgeting, because it enables you to reduce or increase labor costs as necessary. To figure how much you pay for an employee, you must count all your payroll costs. Include your share of employment taxes, workers’ compensation, and 401(k) match, your health-insurance contribution and all other benefits. When you add these costs to what you pay the employee annually, the result is likely much higher than what her paycheck shows. To arrive at labor burden rate per hour, divide your total annual cost by an employee's annual working hours.

Knowing your overhead expenses is essential to budgeting and setting prices for goods and services. If you don’t know your overhead costs, it’s difficult to know how much money your business is making. You must know the amount you’re spending on operating costs to get a true picture of your revenue and expenses. For example, if you buy items for resale, your revenue from the resale goes toward buying more items and paying overhead costs. Overhead expenses cover office rent, liability insurance, membership fees and subscriptions, advertisements, company vehicles, interior decoration, managers' and supervisors' salaries, business taxes, office equipment and other administrative costs.

Fixed overhead costs don’t change, are easy to predict and don't depend on your volume of sales. They include rent, insurance, depreciation on assets such as equipment and vehicles, office expenses and administrative salaries. You might allocate some fixed expenses to specific departments: for example, factory utilities and rent, production supervisors' salaries and inventory insurance. Variable, or semi-variable, overhead expenses are more difficult to predict because they fluctuate according to sales, seasonal changes, promotional outcomes and changes in the cost of goods and services. They include phone expenses, office supplies and mailing and promotional expenses.