Understanding labor burden
The payroll taxes, benefits, and insurance layered on top of base wages. A landscaping crew's true cost is the hourly wage plus these extras.
Definition
Labor burden is the extra payroll cost that sits on top of base wages. On the books, it is the employer taxes, benefits, and insurance the business owes because a person is on payroll.
A landscaping crew that earns $25 an hour does not cost the company $25. The employer share of payroll tax, workers' compensation, and health coverage adds dollars that never appear on the paycheck stub.
Cash-basis books may feel these extras when the tax or the premium is paid. Accrual books record them in the same week the wages are earned.
This cost is the layer on top of the wage. It is not the wage itself, and it is not the invoice the customer will pay.
Where it shows up
Balance Sheet: Related to payroll taxes and benefits still owed.
P&L: Related to the extra labor cost sitting on top of base wages.
Cash flow: Decreases in payroll tax liability, reported cash from operating activities decreases.
See also: Fully Burdened Labor Rate · Direct Labor · Employer Payroll Taxes
When you look at your Balance Sheet, unpaid employer tax sits in payroll tax liability. Unpaid benefits can sit in accrued payroll or in a separate benefits payable until the carrier is paid.
When those unpaid balances are high, cash will leave soon for the tax deposit or the premium. When they are low, the extras have already been paid, or the crew hours were light.
The Income Statement picks up this extra cost in the same period as the wages when books are on accrual. For a service crew, that often sits with cost of services; for a product shop it can ride with the job until the goods are delivered.
On the Statement of Cash Flows, paying the tax or the premium is the cash event. Cash from operating activities falls when those extras leave the bank.
A payroll accrual at month-end should include the extras on hours that crossed the close. Current liabilities hold the unpaid piece until the deposit date.
How it works
The crew works a week of yards. Base wages are one cost; the extras on those wages are this cost.
If the tax deposit has not been made, the bookkeeper debits this cost and credits payroll tax liability. The extras are already owed, even though cash has not moved.
Benefits can work the same way. A monthly health premium that covers this week's hours belongs with those hours, even if the carrier bill is due next month.
Stay with the extras when you read this cost. The $25 hourly wage is the base; this line is only what the company adds.
Some shops post the extras to the same job that received the wage. Others keep a single burden pool and spread it later.
A prepaid annual workers' compensation policy starts as prepaid expenses. The piece that belongs to this week's hours then moves out of that prepaid balance and onto this cost.
Do not treat the tax deposit as a new expense if the extras were already accrued. The deposit clears the liability; this cost was recorded when the wages were earned.
After the week closes, the extras that belong to delivered work have already hit the P&L or the job. Paying them later is a Balance Sheet and cash event.
Example
A landscaping crew earns $4,000 of wages this week. Employer payroll taxes on those wages come to $720, and the tax deposit is due next week.
The extras are recorded:
Debit: Labor burden $720
Credit: Payroll tax liability $720
This extra cost hits the books, and payroll tax liability (a liability) goes up by $720. Cash has not moved.
The Income Statement, or the jobs those hours belong to, now includes $720 on top of the $4,000 wage. The true labor cost for the week is $4,720 before benefits.
When the tax deposit is paid, the shop clears the $720 liability and cash falls. This cost stays at $720; only the liability and the bank account move.
Common mix-ups
Labor burden is not the wage. The wage is what the crew takes home; this cost is what the business adds on top.
Labor burden is not the employee's withheld tax. Withholding is money taken from the paycheck and owed to the government; this cost is the employer's own extra.
Labor burden is not the fully burdened labor rate. Burden is the extra dollars; the rate is those extras plus the wage, divided by hours.
Related terms
- Fully Burdened Labor Rate: The all-in hourly cost of an employee including burden.
- Direct Labor: Wages for the people who directly make the product or deliver the service.
- Employer Payroll Taxes: The payroll taxes the business owes on top of employee wages.
- Employee Benefits Expense: The cost of health coverage, retirement match, and similar employee programs.
- Job Costing: Tracking revenue and cost for each individual job, project, or order.
- Payroll Expense: The wage cost of employees recorded on the income statement.
- Cost Of Services: The direct cost of delivering services, used in place of cost of goods sold.
- Overhead Allocation: The method for spreading indirect costs across products, jobs, or departments.