The Burden of Payroll
And I am not talking about the actual time and cost of getting your employees paid, but all those costs often not considered when providing a customer an estimate or proposal or not included in budgets and financial planning.
The cost burden of payroll includes all expenses incurred over and above an employee’s wage. To get to the true hourly cost of an employee you need to take these into consideration. The employer’s share of FICA, Medicare, and State and Federal unemployment taxes are common examples of payroll burden, however there are others to include in your payroll costs.
Workman’s compensation and part of your general liability insurance premiums are based on wages paid. These rates vary from state to state as well as job classification and these costs are part of your payroll burden. You can find out the cost of the premium per wage dollar paid from your insurance agent.
The cost of paid vacation, sick, personal and holidays should also be included in the cost of payroll. To do this, determine the number of paid days off an employee is entitled to and multiply that number by the employee’s average daily wage. Then divide by the number of working days in a year (for example – 52 weeks less 2 weeks vacation equals 50 working weeks). And then divide by the average number of hours worked in a week resulting in an average hourly cost of paid time off. For example an employee paid $800.00 per a 40 hour week with two weeks paid vacation, 1 week of paid sick leave and eight paid holidays computation would be: 10 days vacation + 5 days sick + 8 holidays = 23 paid non-working days. $800/5 days = $160 per day paid wages. $160 x 23 non-working days = $3,680 (yearly cost of non-working days). There are 260 possible working days in the year (52 x 5) less the 23 non-working days = 237 working days. These 237 working days need to be burdened with the cost of the 23 non-working paid days. Divide the expense of the non-working days by the number of working days ($3,680/237) which is $15.53 per day. Divide the $15.53 by 8 hours and you have your hourly burden cost for paid days off. Depending on your company you may have employees working overtime or even less than a 40 hour week occasionally. Unless you think this may affect your burden substantially you can base your figures on the “usual order of business”.
Other expenses you should consider are health, dental, and/or disability insurance premiums paid by the company (net of employee contributions). And if you are providing a vehicle to your employee the cost of purchasing, financing and insuring that vehicle may be an expense to include. Also any other employee benefit cost that the company provides should be considered as part of the payroll burden charge.
When all is said is done, the wage you pay your employee for a day’s work is just the beginning of the cost of that employee. Not determining the cost of your payroll burden can shave profits from your bottom line. And without profits we can not continue to stay in business.
