By calculating both burden and overhead rates, organizations gain a complete picture of the full cost of employing individuals in various roles, enabling better budgeting and financial planning.
Employee Burden Rate
The employee burden rate is the added costs an employer incurs beyond an employee’s base salary or hourly wage. These costs include benefits, payroll taxes, insurance, and other employee-specific expenses. It helps employers understand the full cost of employing someone.
Burden Rate = Total Indirect Costs / Base Salary
Typically Include:
- Payroll taxes (e.g., Social Security, Medicare, unemployment insurance)
- Health insurance, retirement benefits
- Paid time off (PTO), sick days, vacation, holidays.
- Training costs
- Worker’s compensation insurance
Employee Overhead Rate
The employee overhead rate includes broader costs of running the business that are not directly tied to the employee’s salary but are necessary for their employment. These can include office space, utilities, software licenses, and equipment.
Overhead Rate = Total Overhead Costs / Base Salary
Components Typically Included:
- Office rent and utilities
- Technology costs (hardware, software licenses, IT support)
- Administrative support
- General liability insurance
- Recruitment and onboarding expenses
- Work related travel
Overhead Rate = Total Overhead Costs / Base Salary
Components Typically Included:
- Office rent and utilities
- Technology costs (hardware, software licenses, IT support)
- Administrative support
- General liability insurance
- Recruitment and onboarding expenses
- Work related travel
Bonuses should only be included in the denominator if they are a consistent or expected cost, such as when they are predefined with measurable targets.
