What is Payroll Burden & How to Calculate it in 2024
February 01, 2023
Does the term “payroll burden” ring a bell to you?
It’s 2024—and if you’re part of your company’s Human Resources department, it’s time to refine your payroll knowledge!
Human resources is mainly responsible for overseeing a business’s manpower. That means managing employee performance and fulfilling all obligations coupled with ensuring workers get properly compensated.
Understandably, the words “burden” and “payroll” don’t seem the least bit enticing when combined together. But, by taking the time to learn its definition and the impact it has on your operations, you’ll come to understand its significance.
What is Payroll Burden?
A payroll burden pertains to the sum of all payments that you cover for your employees. These payments are reflected on employee paychecks as their net salary.
Most payroll burden costs are government-mandated. Meanwhile, contributions to employee insurance are handled at the employer’s discretion.
Examples of payroll burden include federal and state unemployment taxes, social security and Medicare taxes, and company-funded employee benefits such as meals, uniforms, equipment, travel allowances, and paid time off.
The Importance of Payroll Burden
You might ask, “Why is it called a burden?”—Well, that’s because these are responsibilities that you shoulder as an employer when you hire workers to do a certain job.
They perform tasks to help keep your company well-oiled and running, and so the least you could do is toensure their taxes are secured and well taken care of.
Payroll burden helps employers gauge their labor costs. It serves as a reference in determining the expenses and liabilities that come with hiring an employee.
Your employees are a part of your financial responsibilities for as long as they are employed in your company. That said, it is best to evaluate each employee’s labor costs from a long-term perspective.
Since taxes and employee benefits comprise a typical payroll expense, dutifully fulfilling this type of operating cost also indicates the legitimacy of a business.
Calculating your payroll burden likewise gives you an in-depth look into thelucrativeness of your business. Will hiring additional staff be more beneficial to your operations, or will it potentially topple the balance of your expenditure?
Is it the proper timing to expand your workforce, or should you shift your focus to other important aspects of maintaining your business?
International Payroll Burden
Does the payroll burden percentage and calculation differ internationally?
Yes. Some countries have much higher payroll costs than the US. Understanding how payroll burdens differ globally will benefit your business if you decide to employ workers internationally.
You have to factor in the living expenses, labor tax rates, and social benefits in each country where you plan to hire additional workers.
For instance, Brazil’s average payroll burden from 2019 to 2022 reached 73.3%. One of the main reasons behind the high payroll costs is their government’s objective to fund more social welfare programs to improve living conditions for the masses.
When it comes to paid time off and benefitslike travel allowances, Sweden and Japan have some noteworthy standards. Sweden offers parents as many as480 days of paid parental leave. Meanwhile, Japan includes a commuting allowance in employee paychecks.
Here is a table comparing the differences in global labor tax percentages, according to the OECD:
Average Labor Taxes (according to the OECD)
Belgium has some of the highest labor tax rates in Europe. It can take up to 38% to 50% of the workers’ salaries. High income taxes are the result of the added taxes on fuel, tobacco, and alcohol, which, in turn, are used by the Belgian government to finance programs for education, healthcare, and social welfare.
Colombia, on the other hand, has had a 0.0% tax wedge on average for single workers from 2000 to 2021. Simply put, an average single worker in Columbia gets the full 100% of their salary after taxes and deductions.
Japan’s tax system is progressive, just like in most countries. Tax rates increase depending on the salary of the employee. Workers earning $15,000 or less are taxed at 5%, while those whose earnings range from $26,000 to $70,000 have 20-23% applied taxes.
Japanese workers who earn $140,000 to $310,000 pay taxes that take around 40-45% of their salaries. Between the US and the UK, the former has different rates for federal and state taxes. The latter imposes progressive tax rates on Northern Ireland and England. Scotlandhas tax rates that differ from the rest of the UK.
The majority of states in Mexico impose a significantly low income tax rate on employees, with the lowest being 3%.
How to Calculate Payroll Burden
The simplest way to calculate your payroll burden is to divide the indirect costs per employee by the direct payroll or employee costs. Indirect costs refer to the taxes and benefits paid per employee, while direct costs are your employee’s gross salary.
#1. Determine the Gross Salary
If your workers are paid hourly wages, get the total number of hours worked in a given pay period, then multiply it by their hourly rate.
If you are hiring salaried employees, first you need to get their total annual wage. There are 52 weeks in a year, and let’s assume your employees must complete a fixed 40 hours of work per week. Multiply that number of hours by 52 weeks, and you will get 2,080 hours in total.
Divide the annual wage by 2,080 hours.
#2. Calculate Taxes
Employers and employees split the fixed 2.9% tax rate for Medicare and 12.4% for Social Security tax.
When calculatingFUTA, note that there is a fixed 6% rate and a wage base of $7000. SUTA is also dependent on which state you are based in, so make sure you are complying with the correct rules and regulations.
In some states, employers and employees share the payments for SUTA taxes.
#3. Calculate Voluntary Payments
Voluntary payments will include paid time off (PTO), additional training costs, insurance, and 401(k) matching.
It is important to record all PTOs per employee and indicate which employees are subject to additional training or seminars if provided by your company. The same practice applies to their insurance and retirement plans.
#4. Calculate the Total
Here is a sample breakdown of how to calculate your payroll burden:
- Annual taxes combined =$9,000
- Voluntary payments and benefits =$2,000
- Gross annual pay =$75,000
Then add up your indirect employee costs: $9,000 + $2,000 = $11,000
And finally: $11,000 / $75,000 x 100 = 15% payroll burden percentage
In the example, the employee earns an annual gross pay worth $75,000. Their annual taxes amount to $9,000, with additional benefits costing $2,000 more. When combined, their indirect employee costs are $11,000. Divide that amount by her gross wage to generate the payroll burden percentage of 15%.
All in all, is a payroll burden truly as dreadful as its name indicates? Well, a better way to go about it is to think of the payroll burden as a feat that only a dependable and dutiful employer can do.
Running a business is no cakewalk, let alone ensuring all employee salaries, benefits, and taxes are properly compensated and accounted for. Hence, careful and advanced planning in managing your payroll burden allows you to equip your business financially and keep your employees satisfied and happy.
- Payroll burden is the sum total of all employee costs that is covered by an employer.
- It includes FUTA and SUTA, social security and Medicare taxes, and company-funded employee benefits.
- Calculating a company’s payroll burden effectively sheds light on labor costs and helps employers gauge the profitability of their business in the long run.
- Payroll burdens differ per country because of the differences in income tax rates and benefits implemented.
- To determine a business’s payroll burden percentage, get the sum of indirect costs per employee (taxes and benefits), divide it by the direct cost per employee (gross wage), and multiply the result by 100.