Evaluating the costs of hiring new employees means understanding that an employees’ wages are not the only expenses you’ll have. More than this, there are many hidden expenditures to consider when you add new staff to your team. These are collectively known as payroll burden, or labor burden.
In this article, we explain how to define and calculate payroll burden using average wages. We also offer a summary of payroll burden costs in different countries and regions so that you can make expansion plans with insight and knowledge.
Payroll Burden: What Is It and How Do We Recognize the Costs?
Simply put, payroll burden (also called labor burden cost) is the true sum of the total costs required when hiring a new employee. While meeting minimum wage requirements for an employee’s salary is an obvious expense, there are numerous other indirect employment costs, such as:
- Social insurance or social security and medicare taxes
- Health insurance, whether national or private
- Paid annual leave
- Expenses on paid time
- Pension plan
- Maternity leave and parental leave
- Company vehicles or transport costs
- Relocation packages for expatriate employees
- Work visa and permits for expatriate employees
- Statutory holidays
- Unemployment benefits
- Workplace accident insurance
- Training costs
- Incidentals of the hiring process (background checks etc.)
The exact list of costs will differ according to local labor and employment laws and if you are hiring locally or globally. To accurately calculate payroll burden, therefore, you need to consider both the direct and indirect payroll costs involved.
In addition, this includes any other benefits you may offer employees such as cellphone coverage, company equipment, gym membership, dental, etc.
How To Calculate Payroll Burden Rate for Employees: An Example
Imagine you are in the hiring process for a new employee in the USA. The employee’s gross salary is $50,000 a year. However, then you have to spend another $5000 on covering the employee’s taxes, insurance, and benefits.
To find the payroll burden rate, simply divide the indirect hiring costs ($5000) by the direct costs ($50,000). Rather than a dollar amount, this comes to a rate of 0.1%, meaning that you are paying 0.1% in indirect costs for every dollar of salary you pay the employee.
The Importance of Understanding Payroll Burden
Having a clear idea of the costs of hiring an employee allows a business to make better decisions and remain profitable while not overspending to expand. Of course, certain factors have more of an impact on payroll burdens, such as the location and employment tax rate.
Expanding to a country that has a high cost for required employee insurance and benefits results in a heavier payroll burden, which can affect your planning.
Calculating the burden rate helps a business make better, smarter decisions like hiring temporary workers. When your regular employees are on annual leave or maternity leave, you may need to hire temporary workers or independent contractors to fill in their place.
Alternatively, you can choose to hire an agency to reduce the costs of contractor work or outsource your payroll tasks to a PEO or EOR service. That way you can continue providing benefits for your employees and save money on expanded HR and payroll options.
Payroll Burden Around the World: From the US to China
USA
Payroll tax in the US includes federal tax, state tax, Medicare, and social security taxes. The federal minimum wage is $7.25 per hour, although each state has its own minimum wage criteria. This means that the average cost of hiring an employee in the US is around 15-25% of the employee’s annual salary.
Canada
Employers in Canada are expected to make Canada Pension Plan (CPP), Employment Insurance (EI), and social security program payments. For the moment, the minimum wage is CAD$15 per hour though provinces are territories may differ. The average cost of payroll burden is 12-20% of the annual salary.
EU
Hourly wage minimums in EU countries range from 7-46.9 euros. Social security contributions also differ by country, going from 45% in France to 8.5% in Switzerland. Some countries like the Netherlands cap social security contributions at a maximum.
Mexico
Social security tax in Mexico is determined by state and ranges from 1-3%. Income tax is charged at a progressive rate from 1.92-45%. The minimum wage is MXN$207.44 per day.
China
Payroll tax in China includes 5 different social security categories and 1 housing fund. Exact figures differ according to region and province. However, in general combined income tax ranges from 3-45%,
Japan
For now, the minimum wage is Japanese yen $1072 per hour. In general, income tax ranges from 5-45%. In addition, social security contributions average 14% after that. Altogether, the average cost of hiring an employee is around 16% of the gross annual salary.
These figures simply factor in the mandatory employment costs that come with organizing payroll. In addition, you need to consider all other expenses that you may need to offer to be competitive in that market.
Why Reducing Payroll Costs is Vital for Businesses on the Global Market
Of course, high payroll burden can negatively impact your company’s finances and cause you to have to let go of valuable employees or downsize the business at key points.
When you expand into a new country without accurately determining the total payroll costs, you can end up not preparing enough for spending. Because of this, you may not be able to hire necessary team members for new projects. This can result in:
- Slow market entry
- Higher employee turnover rates
- Employment law compliance errors
- Loss of clients
- Reduce production and delayed operations
Fortunately, there are solutions available for every situation. Whether you are struggling to decrease a high payroll burden or hoping to avoid the problem altogether, partnering with a global PEO or EOR can ease the burden. Then, these options can give you the reassurance and ability to hire quickly, easily, and within your budget range.
How INS Global Can Help
With over a decade of experience in helping companies of all sizes and all around the world, INS Global has all the experience and expertise you need to enter new markets and hire new talent smoothly and efficiently.
Our legal team is familiar with local laws and tax regulations, and we will ensure that every aspect of the company is kept up-to-date and compliant. At the same time, our expert recruitment team can utilize a range of online and offline local sources. These sources include job boards, job fairs, local government schemes, and more.
Finally, with a PEO or EOR handling recruitment, onboarding, contract management, payroll, and HR services, you can focus your time and energy on leading the company closer to your vision of success.
So, contact us here today to learn more.
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