Remote Work Glossary
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Table of Contents
What is payroll burden?
What expenses are included in payroll burden?
Direct vs. indirect payroll costs
How to calculate payroll burden rate
Tips for evaluating payroll burden
Easily manage payroll burden with Deel Global Payroll
What is payroll burden?
What is payroll burden?
Payroll burden, also known as labor burden, is the total cost an employer incurs from paying employee salaries, payroll taxes, benefits, and retirement contributions.
What expenses are included in payroll burden?
Payroll burden encompasses both required and discretionary costs associated with employing staff. Key expenses include:
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Employer payroll taxes: Contributions to Social Security, Medicare (FICA), federal and state unemployment insurance (FUTA and SUTA), and other statutory taxes
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Employee benefits: Costs for health insurance, retirement plan contributions (such as 401(k) matches), life and disability insurance, and wellness programs
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Paid time off (PTO): Expenses related to vacation, sick leave, holidays, maternity and paternity leave, and other forms of paid leave
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Bonuses and incentives: Costs resulting from performance bonuses, commissions, and other incentive-based compensation
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Training and development: Costs for onboarding, professional development, certifications, and continuing education
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Work-related expenses: Uniforms, equipment, travel reimbursements, and work-from-home stipends
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Administrative overhead: Expenses related to payroll processing, human resources management, and compliance
Given these variables, payroll burden costs can vary widely depending on which countries you are paying employees in and your business size.
For example, small businesses in the U.S. with less than $600,000 in annual revenue experience a 12% payroll burden from health insurance costs compared to 7% among larger companies with annual revenues over $2.4 million.
Direct vs. indirect payroll costs
Understanding the distinction between direct and indirect payroll costs contributes to strategic financial planning and accurate calculations of your company’s payroll burden.
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Direct payroll costs refers to employee salaries, hourly wages, bonuses, commissions, and other types of compensation paid directly to your employees
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Indirect payroll costs refers to expenses not included in an employee’s direct compensation. This includes costs such as health insurance, retirement plans, taxes, and social security
How to calculate payroll burden rate
To calculate your payroll burden rate, start by adding up all direct payroll costs and indirect payroll costs. Once you have those key numbers, follow the formula below:
Payroll burden rate = (Indirect payroll costs ÷ direct payroll costs) x 100
For example, say your business has a total of $150,000 in direct payroll costs and $50,000 in indirect payroll costs. To calculate the payroll burden rate, you would divide $50,000 by $150,000, then multiply that number by 100 to get your payroll burden rate as a percentage. In this case, your payroll burden rate would amount to 33%.
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Tips for evaluating payroll burden
Effectively evaluating your payroll burden ensures you’re not underestimating the true cost of your workforce. Here are four tips to help you assess and optimize your labor costs.
1. Conduct regular compensation audits
A compensation audit goes beyond salaries. It includes analyzing all employer-paid expenses such as benefits, bonuses, training, and taxes. Review each component by department or role to understand where most of your labor budget is going.
Doing this quarterly or biannually allows you to identify changes in costs, uncover inefficiencies, and reallocate resources when needed. For example, if healthcare premiums are rising, you could explore more cost-effective benefits plans without compromising quality and employee satisfaction.
2. Benchmark payroll costs against industry standards
Compare your total payroll burden with similar companies in your industry and region. This benchmarking helps you assess whether you’re overspending or underinvesting in areas like benefits or professional development.
Use sources like the U.S. Bureau of Labor Statistics (BLS), the Organization for Economic Cooperation and Development (OECD) labor data, or specialized HR consultancies for reliable information. Understanding these benchmarks can also guide compensation strategy as you scale into new markets.
3. Consider location-based factors
To fully understand the true cost of your payroll burden, evaluate factors like average annual salary, local labor regulations, tax laws, and cost of living in each country where you operate.
For example, payroll expenses in Brazil are impacted by unique factors such as 13th month pay and strict requirements for social contributions reaching up to 28.8% of an employee’s salary.
The industry and region you wish to hire in also affects payroll costs. Industries like manufacturing and retail could have unique collective bargaining agreements in Brazil, and major cities like São Paulo and Rio de Janeiro with higher living costs require higher employee compensation.
4. Use payroll analytics tools for granular insights
Modern payroll systems offer analytics dashboards that track key metrics such as global workforce costs, salary trends, and benefits utilization. These insights can highlight opportunities for cost savings or reallocating spend.
Deel’s unified platform provides centralized visibility across all employment types (contractors, part-time and full-time employees), making it easier to analyze payroll burden across borders. You can monitor trends, flag anomalies, and forecast future labor costs more accurately.
Easily manage payroll burden with Deel Global Payroll
In summary, payroll burden encompasses a multitude of unique factors that can be difficult to manage. But with a comprehensive global payroll solution and access to local payroll experts in 100+ countries, keeping track of your payroll burden and staying compliant becomes a more efficient process.
By gaining a better understanding of your business’s payroll burden, you can make more informed financial decisions, set budgets accurately, and develop competitive compensation planning to attract top talent.