What is Burden Rate? Formula & Calculation

Human resources is often associated with hiring and onboarding, but its role in workforce management extends further. One key financial factor that businesses need to consider is the burden rate, which influences budgeting, wage decisions, and overall labor cost analysis.

A clear understanding of the burden rate allows organizations to assess labor costs more accurately and make informed financial decisions. This article talks about burden rate, its formula, how to calculate it, and why it matters to businesses.

What is employee burden rate?

Burden rate is the total cost a company pays to hire and maintain an employee in addition to their wages. The main goal of calculating the burden rate is to understand the true cost of employment and support better budgeting and financial planning.

Reports suggest that the typical employee burden rate ranges from 1.25 to 1.4 times the employee’s salary. The burden rate includes various costs, such as:

• Payroll taxes

• Workers' compensation

• Health insurance

• Paid time off

• Training

• Travel expenses

• Vacation and sick leave

• Pension contributions

• Other benefits

The burden rate formula varies based on the type of cost being measured. For labor, the burden rate formula is: Labor burden rate = labor burden ÷ payroll cost

For inventory-related costs, the burden rate formula is: Inventory burden rate = overhead cost ÷ activity.

Budgeting and compensation planning go hand in hand. With the right Compensation Planning tool, you can accurately assess employee costs, optimize resource allocation, and make data-driven pay decisions that support business growth.

Labor burden rate vs inventory burden rate

There are two types of burden rate that impact business costs: labor burden rate and inventory burden rate.

The difference between the two is that labor burden rate applies to the indirect costs of employing workers, such as payroll taxes and benefits, while inventory burden rate accounts for the overhead costs of managing inventory, such as storage and utilities.

The table below provides a comparison through examples:

Types	Examples
Inventory burden rate	Operating machinery Facility operations Equipment Materials Stocking and storage Upkeep of buildings
Labor burden rate	Workers' compensation Driver's insurance Vacation time Paid time off Sick pay Employee training Health insurance, including dental and vision Tuition reimbursement Liability insurance Student loan debt assistance Retirement plan

Aside from employee burden rate calculation, organizations need accurate compensation planning to support better budgeting and pay decisions.

When organizations need employee burden rate calculation

Companies and businesses often need employee burden rate calculation when they want to:

1. Make informed hiring decisions: Companies assess burden rates to understand the total financial impact of each new hire.

2. Ensure accurate budgeting: Organizations calculate burden rates to ensure budgets reflect the true cost of labor, beyond base salaries.

3. Plan effective compensation planning: Employee burden rates provide insight into the actual cost of employee benefits, which aids in competitive strategy.

To have a winning compensation planning strategy, organizations can use Salary.com's Compensation Planning Software. This reliable tool helps manage merit raises, bonuses, commissions, incentives, equity, and total rewards across an organization.

Benefits of understanding and calculating burden rate

Understanding employee burden rates provides organizations with key advantages, such as

• Improves budgeting and cost control

  Knowing the full cost of employees helps companies create more accurate budgets and manage expenses effectively. This allows businesses to allocate resources efficiently and prevent unexpected financial strain.

• Improves compensation and benefits planning

  Understanding employee burden rates ensures that salaries and benefits are both competitive and financially sustainable. This helps companies attract and retain talent while keeping labor costs in check.

  Some organizations use Compensation Planning Software to simplify pay management and ensure fairness. Salary.com, for example, provides a solution that manages all compensation plans, including bonuses and equity, in one platform.

• Enables more effective hiring decisions

  Considering the total cost of employment, including taxes and benefits, helps businesses make informed hiring decisions. It allows companies to determine whether full-time, part-time, or contract workers are the best fit for their budget.

• Increases transparency in labor costs

  A clear breakdown of labor expenses gives leadership a better understanding of workforce costs. This transparency builds trust with stakeholders and supports better financial planning.

• Allows for a better understanding of employee value

  Knowing the full cost of employees helps companies evaluate their contributions to business performance. This information supports fair compensation decisions and investment in employee development.

• Aids in compliance maintenance

  Accurate burden rate calculations help companies meet labor law requirements and avoid penalties. Proper cost tracking also ensures compliance with tax regulations and benefits administration.

How do you calculate burden rate?

The burden rate calculation depends on the type being measured, such as labor or inventory burden. Organizations also need to use the burden rate formula mentioned earlier.

Below are the steps to calculate both labor and inventory burden rates:

Labor burden rate calculation

To fully understand the labor burden rate, consider this scenario: A company hires in-house content writers and wants to calculate the total cost of employment, including taxes, benefits, and other expenses.

Formula: Labor burden rate = labor burden ÷ payroll cost

1. Find total labor burden: Let's say the company spends $5,000 on payroll taxes, $7,000 on employee benefits, $2,000 on writing and SEO software, and $1,000 on office expenses. The total labor burden cost is $15,000 per year.

2. Find total payroll cost: Now that you know the total labor burden, calculate the total wages and salaries paid to content writers. For this example, the company pays $50,000 in total payroll costs.

3. Calculate labor burden rate: Divide $15,000 by $50,000, resulting in 0.30 or 30% if multiplied by 100 to express as a percentage.

Labor burden calculation: Labor burden rate = 15,000 ÷ 50,000 = 0.3 or 30%

In this scenario, the actual total labor cost of employing content writers is 30% higher than their base salaries.

Inventory burden rate calculation

Let's say a furniture manufacturing company wants to determine the total cost of operating its machinery, including maintenance, electricity, depreciation, and rent.

Formula: Inventory burden rate = overhead cost ÷ activity

1. Find total overhead cost: Suppose the company spends $3,000 on maintenance, $2,500 on electricity, $4,500 on depreciation, and $6,000 on rent. The total overhead cost amounts to $16,000 per month.

2. Determine activity level: The company operates its machinery for 2,000 hours per month.

3. Calculate inventory burden rate: Divide $16,000 by 2,000, which equals $8 per machine hour.

Inventory burden cost calculation: Inventory burden rate = $16,000 ÷ 2,000 = $8 per machine hour

Here, the company adds $8 to the direct production costs for every hour the machine is in use. If it takes two hours to manufacture a table, the company will add $16 to the cost of each table to determine the true cost of production.

FAQs

Here are some common questions revolving burden rate formula:

What is the burden rate of inventory?

The inventory burden rate is a calculation that helps businesses determine the true cost of their inventory by factoring in indirect production costs associated with its production, storage, and handling.

Note: The difference between direct and indirect costs is that direct costs are tied to production, like raw materials, while indirect costs include overhead, like warehouse rent.

What is the burden rate in project management?

In project management, the burden rate shows the indirect costs of running a project as a percentage of direct labor costs.

For example, if a project team’s salaries total $50,000 and indirect labor costs add up to $10,000, the burden rate is $10,000 ÷ $50,000 = 20%. This means managing the project costs 20% more than just the salaries alone.

What is a typical employee burden rate?

As mentioned earlier, the typical employee burden rate ranges from 1.25 to 1.4 times the base salary. If an employee earns $40,000, the total cost to the company may be between $50,000 and $56,000.