What is Burdened Labor Rate?
The burdened labor rate is the total cost to a company for employing a staff member, calculated on an hourly basis. Unlike the base hourly wage, which only accounts for the gross paycheck an employee receives, the burdened rate includes all "hidden" costs such as payroll taxes, insurance, benefits, and overhead. Understanding this metric is crucial for accurate job costing, profitability analysis, and contract pricing.
If you bill a client based solely on the employee's salary without accounting for the burden, your business may lose money on every hour worked. The calculator above helps you determine the true cost of an hour of labor.
How to Calculate Burdened Labor Rate
The formula for calculating the burdened labor rate involves summing the base wages and all indirect costs, then dividing by the total number of billable hours.
Burdened Rate = (Base Annual Salary + Payroll Taxes + Benefits + Overhead) / Billable Hours
Key Components of the Calculation:
- Base Wages: The gross hourly rate or annual salary paid to the employee.
- Payroll Taxes: Mandatory government costs including FICA (Social Security and Medicare), FUTA (Federal Unemployment), and SUTA (State Unemployment).
- Benefits: Costs for health insurance, dental/vision plans, 401(k) matching contributions, paid time off (PTO), and sick leave.
- Overhead: Indirect costs attributed to the employee, such as workers' compensation insurance, equipment (laptops, uniforms), software licenses, and office space utilities.
- Billable Hours: The total hours the employee is available to work per year. A standard full-time year is typically calculated as 40 hours/week × 52 weeks = 2,080 hours.
Example Calculation
Let's look at a realistic example for a technician with a base wage of $30.00 per hour.
| Cost Category | Annual Cost | Notes |
|---|---|---|
| Base Wages | $62,400 | $30/hr × 2080 hours |
| Payroll Taxes (approx 10%) | $6,240 | Social Security, Medicare, Unemployment |
| Benefits | $8,500 | Health Insurance, 401k Match |
| Overhead/Supplies | $3,000 | Tools, Software, Workers Comp |
| Total Annual Cost | $80,140 |
Burdened Hourly Rate: $80,140 / 2,080 hours = $38.53 per hour.
In this example, even though the employee is paid $30/hr, the company must earn at least $38.53/hr just to break even on that employee's time. To make a profit, the billable rate to the client would need to be significantly higher than $38.53.
Why is Labor Burden Important?
Calculating the labor burden is essential for several reasons:
- Accurate Pricing: Ensures service rates cover all costs and generate a profit margin.
- Budgeting: Helps forecast total company expenses when hiring new staff.
- Profitability Analysis: Identifies which projects or departments are truly profitable versus those that are draining resources due to high overhead.
Frequently Asked Questions
What is a good labor burden rate?
Labor burden is often expressed as a percentage of base pay. A typical labor burden rate ranges from 25% to 50% depending on the industry and the benefits package offered. In highly regulated industries with high insurance costs (like construction), it can be even higher.
Does the burdened rate include profit?
No. The burdened labor rate represents the break-even cost of the employee. To calculate a billable rate (what you charge the client), you must add your desired profit margin on top of the burdened rate.