Burden Rate: Definition and Cost Examples

What Is the Burden Rate?

The burden rate consists of indirect costs associated with employees, or inventory, over and above gross compensation or payroll costs. Typical costs associated with the burden rate include payroll taxes, workers' compensation, health insurance, paid time off, training, travel expenses, vacation, and sick leave, pension contributions, and other benefits.

In short, the burden rate provides a truer picture of total absorbed costs than payroll costs alone. It should not be confused with an individual's or firm's tax burden.

Key Takeaways

  • The burden rate refers to the total cost to a company for hiring and maintaining an employee beyond their direct compensation in wages.
  • Burden rates will include items such as training, fringe benefits, sick leave, and pension contributions, among several others.
  • Many costs associated with the burden rate, such as payroll tax and social security deductions, are mandated by the government. Others, such as pension contributions, may be optional.

How the Burden Rate Works

The burden rate takes into account all of the auxiliary, indirect, and incidental costs of hiring and retaining a worker that are often not readily apparent. Because total labor costs (including the burden rate) may be as much as 50% higher than base payroll costs alone, it is necessary to calculate the burden rate accurately to get a better picture of profitability and efficiency per worker.

The burden rate is made up only of costs above and beyond the employee’s associated base salary or compensation and is often considered a hidden cost of maintaining an employee. The burden rate includes additional liabilities associated with employee costs, such as any legally mandated insurance, additional benefits, and paid leave.

Burden Rate Costs 

The most commonly burden rate expenses are the various payroll taxes, such as those associated with Social Security, Medicare, unemployment, and any additionally mandated workers' compensation required by the federal government or the state the business is operating in.

If a business is over a certain size, there may be additional mandatory expenses, such as healthcare offerings that must be provided to each employee. Depending on the location of the business, there may be additional local payroll or job training taxes.

Some businesses use information regarding the burden costs to determine where they will choose to operate. For example, certain costs may vary dramatically from one state to another, which can make different locations more or less attractive as places to conduct business.

Optional Burden Rate Costs

Other benefits may qualify as burden costs as well. This can include retirement benefits and health-related accounts, including base healthcare offerings (if a business is not required to provide benefits to the particular employee), flexible spending accounts or health savings accounts, dental care, vision care, and prescription drug programs. If funds are provided for a company vehicle or cellphone, these must be included in the burden cost calculations.

Further, any food or beverage offerings, wellness activities, training costs, lodging for business trips, and required uniforms may be added if the services are provided by the company.

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