What is labor burden and how do I account for it?
Labor burden is everything you pay for an employee beyond their base wage. When you hire someone at $28 per hour, that’s not what they cost you. The true cost includes payroll taxes, insurance, benefits, and other expenses that come with having someone on your payroll.
The main components of labor burden include employer payroll taxes (Social Security, Medicare, federal unemployment, and state unemployment), workers’ compensation insurance, health insurance premiums you pay, retirement contributions or 401k matches, paid time off including holidays and sick days, and any training or certification costs. For union workers, you may also have contributions to union benefit funds.
The percentages add up quickly. Employer payroll taxes alone run about 7.65% for FICA plus 2-6% for unemployment taxes depending on your state and experience rating. Workers’ comp in construction trades can run anywhere from 5% to 20% or more depending on the work being performed. Roofers and electricians working at heights pay a lot more than office staff. Add health insurance, retirement, and paid time off, and you’re often looking at a 30-40% burden rate on top of base wages.
To calculate your burden rate, add up all burden costs for a period and divide by total base wages paid during that same period. If you paid $180,000 in wages last year and your total burden costs were $54,000, your burden rate is 30%. That means for every dollar of base wage, you’re actually paying $1.30.
Accounting for labor burden correctly means building it into your job costing. When you estimate a job, don’t just multiply hours by the hourly wage. Multiply by the burdened rate. If your framing crew makes $30 per hour and your burden rate is 35%, your true labor cost is $40.50 per hour. Use that number when bidding or you’re giving away margin before the job even starts.
In your accounting software, you can track burden costs as they occur and allocate them to jobs proportionally. Construction job costing should always reflect burdened labor costs rather than just base wages. Otherwise your job profitability reports will look better than reality, and you’ll wonder why there’s less cash in the bank than expected.
Workers’ comp deserves special attention because rates vary so much by trade and by your claims history. A general contractor with multiple crews doing different work should track workers’ comp by job classification, not just as a blanket percentage. The burden on a laborer is different from the burden on a finish carpenter.
Review your burden rate annually. Insurance premiums change, tax rates adjust, and your benefits package may evolve. A rate you calculated two years ago might be 5-10% off today, which throws off every bid you submit. Working with a real estate bookkeeper in American Fork who understands construction can help you keep these numbers accurate and applied consistently across your estimates and job costing.
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