What is payroll burden in construction?
Payroll burden is the set of costs an employer pays on top of gross wages, such as employer payroll taxes, unemployment taxes, workers' compensation, and benefits. It is usually shown as a percentage of wages. It is a subset of labor burden, which can also include paid time off and training. Calculate it from your own payroll and insurance numbers.
Payroll burden is what a worker costs beyond the paycheck. If a carpenter earns $32 an hour, the company pays more than $32 for that hour, because the employer owes its own share of payroll taxes, unemployment taxes, insurance premiums based on payroll, and any benefits it provides. Contractors who price labor at the wage rate alone lose money on every hour.
Payroll burden is a subset of the broader labor burden, which some contractors also load with paid time off, training, and nonproductive time. Whatever the name, it feeds the burden rate used in estimating and job costing.
What payroll burden includes
| Component | Employer cost |
|---|---|
| Social Security (employer share) | 6.2% of wages up to the annual wage base |
| Medicare (employer share) | 1.45% of all wages, no wage base limit |
| Federal unemployment (FUTA) | 6.0% on the first $7,000 per employee, reduced by a credit of up to 5.4% for state unemployment tax paid |
| State unemployment insurance | Set by your state, based on experience |
| Workers' compensation | Rate per $100 of payroll by job classification, adjusted by your experience mod |
| Liability insurance tied to payroll | Varies by carrier and policy |
| Benefits | Health, retirement, union fringes if applicable |
The employee pays a matching 6.2 percent and 1.45 percent out of wages, plus any Additional Medicare Tax, but those come out of the worker's check. Only the employer side is burden. The Social Security wage base changes each year; check the IRS page for the current figure.
Worked example
Say an electrician earns $36 per hour, works 2,000 hours a year, and so earns $72,000 in gross wages. Using illustrative numbers for the items that vary by company:
- Social Security: $72,000 x 6.2% = $4,464
- Medicare: $72,000 x 1.45% = $1,044
- FUTA after the full 5.4% credit: $7,000 x 0.6% = $42
- State unemployment, using an example rate of 2.7% on an example $7,000 wage base: $189
- Workers' comp, example rate $4.50 per $100 of payroll: $3,240
- Health insurance, example employer share: $7,200
Total burden is $16,179, or about 22.5 percent of wages. The real cost per hour is roughly $36 x 1.225 = $44.10, before overhead and profit. Your state rates, comp class codes, and benefits will change the result, sometimes a lot.
Now put that into a bid. If the estimate for a panel change-out carries 40 hours at the $36 wage, it is short by about $324 of real cost before a single dollar of overhead or profit. Across a year of service calls and small jobs, that gap is the difference between a thin margin and none. Price from the burdened rate, then add overhead and profit on top.
Common mistakes
- Using one burden percentage for every trade. Roofers and office staff have very different comp rates.
- Forgetting that some taxes stop at a wage cap. Burden as a percent drops late in the year for high earners, so annualize it.
- Leaving out benefits and union fringe benefits.
- Never updating it. Comp rates and state unemployment rates change, so recalculate at least once a year.
- Counting the employee's withholding as an employer cost.
Related terms
See workers' compensation, labor rate, and overhead. For a full method, read how to calculate labor burden for construction workers.
Frequently asked questions
What is a typical payroll burden percentage for contractors?
It depends heavily on the trade's workers' comp rate, your state, and the benefits you offer, so there is no single answer. Calculate it from your own payroll and insurance numbers.
Is payroll burden the same as labor burden?
They overlap. Payroll burden usually means taxes, insurance, and benefits tied to payroll. Labor burden often adds paid time off, training, and other costs of keeping a worker employed.
Do I include payroll burden on time and materials billing?
Usually yes. Billing rates for T&M work should cover the burdened cost of labor plus overhead and profit, unless the contract says otherwise.
Does the employer pay FUTA on all wages?
No. Per the IRS, FUTA applies to the first $7,000 paid to each employee in a year, at 6.0 percent, with a credit of up to 5.4 percent for state unemployment taxes.
