Burden rate — Solving the profitability puzzle

Why do you own a business? To be part of something bigger than yourself? To build something exciting? Call me an old-timer, but I secretly believe the purpose of every business—okay, most businesses—is to create profit.

What’s profitability, though? Is it how much you have in the bank at the end of each month? Too much money in the bank could also mean you are not investing in business growth. You could buy that PSA software that helps your technicians manage client interactions better. You could finally invest in a foosball table for your office. Then probably hire an R&D manager for growth planning (priorities!).

So, how do you define if your business is profitable?

Hint: Burden rate.

What is burden rate?

The burden rate represents the total true cost of employing a worker, beyond their basic salary or wages. While your paycheck shows only the direct pay, employers incur several additional costs to support an employee. These can include:

• Payroll taxes (like Social Security, Medicare, or local taxes)

• Employee benefits (health insurance, retirement contributions, paid leave, sick leave)

• Training and development expenses

• Overhead costs (office space, utilities, equipment, software, and other operational costs)

Essentially, the burden rate is calculated as a percentage of an employee’s salary that accounts for these indirect costs.

Understanding the burden rate is crucial for businesses because it helps in:

• Budgeting: Knowing the total cost of labor prevents overspending.

• Pricing products or services: Helps in calculating the actual cost of producing goods or offering services.

• Workforce planning: Ensures you account for all expenses when hiring.

For example, if an employee earns $50,000 annually, and the additional costs like benefits and overhead add $15,000, the burden rate is 30%, making the total cost of employing that person $65,000 per year.

What are the components of burden rate?

The burden rate includes all indirect costs that come with employing a worker, giving a complete picture of the total expense. The main components are:

1. Payroll taxes

Payroll taxes are mandatory contributions that an employer must pay on behalf of their employees. These typically include Social Security, Medicare, and unemployment taxes, among others, depending on local regulations. Payroll taxes are not optional and form a significant part of the indirect cost of employment. 

They ensure that employees are covered under government programs and provide benefits such as retirement, disability, and unemployment insurance. While these costs are not directly received by the employee as salary, they are an essential part of the total employment cost for the business.

2. Employee benefits

Employee benefits encompass all perks and protections that a company provides to support its workforce beyond regular wages. This includes health, dental, and vision insurance, which help employees cover medical expenses, and retirement contributions or pension plans, which secure their financial future. 

Paid leave, including vacation, sick days, and holidays, is another key component, along with bonuses and incentive programs designed to reward performance. These benefits not only enhance employee satisfaction and retention but also add to the overall cost of employment, making them an essential part of the burden rate.

3. Training and development

Training and development costs are investments made by employers to improve employee skills and productivity. This includes onboarding new hires, professional development workshops, certifications, and specialized training programs. While these costs do not show up in an employee’s paycheck, they are crucial for maintaining a skilled workforce. 

By providing training and development opportunities, companies ensure that employees remain up-to-date with industry standards, enhance their performance, and contribute more effectively to the organization. These expenses are therefore an integral part of the burden rate.

4. Overhead costs

Overhead costs cover the resources and infrastructure necessary for employees to perform their jobs efficiently. This includes office space, utilities, computers, phones, software, and other equipment, as well as administrative support such as HR or accounting staff. 

Even if employees work remotely, overhead costs like software subscriptions, internet services, and cloud tools still apply. These expenses are indirect because they support the work environment rather than being part of the employee’s direct compensation, but they contribute significantly to the total cost of employment.

5. Miscellaneous costs

Miscellaneous costs include any other indirect expenses that do not fit neatly into the previous categories but are necessary for supporting employees. Examples include uniforms, safety equipment, wellness programs, travel reimbursements, and team-building activities. 

These costs may vary depending on the role or industry but collectively form an important part of the burden rate. By accounting for miscellaneous costs, businesses can understand the full spectrum of expenses associated with hiring and maintaining their workforce.

Why is burden rate important?

The burden rate is a crucial metric for any business because it shows the full cost of employing a worker, not just their base salary. Here, take a look at why burden rate is important:

• Accurate pricing: Knowing the burden rate allows businesses to calculate the total cost of producing a product or delivering a service, not just direct labor. This ensures that pricing covers all expenses, avoids losses, and helps maintain healthy profit margins.

• Informed decision-making: The burden rate provides insight into how much each employee truly costs, which is vital when making strategic decisions such as hiring additional staff, downsizing, or investing in new tools and equipment.

• Profitability analysis: By including indirect costs like benefits, taxes, and overhead, the burden rate offers a more complete view of a company’s profitability. It helps identify areas where efficiency can be improved and ensures resources are used effectively.

• Financial planning: Understanding the full cost of employment helps businesses plan budgets, forecast future spending, and prepare for unexpected expenses. This creates a stronger foundation for long-term financial stability.

• Comprehensive understanding of employee cost: The burden rate goes beyond base salary to factor in all associated costs, such as health benefits, paid time off, taxes, and training. This gives management a true picture of the investment in each employee, supporting better workforce planning.

The proof is in the profitability

The burden rate refers to the cost incurred by the employees in an organization. It includes any associated liabilities including employment perks, paid leave, and overhead expenses. 

In a nutshell, the burden rate is how much your engineers aka billable resources actually cost the business.

The fully burdened cost of the engineers, not just the hourly rate, is a clear-cut measure of the cost of delivering a project. These costs are not always apparent. There could be hidden costs, which when left unnoticed, could end up flying under the radar for years. 

“As a business owner, one of the most important things you need to know is how profitable your business is. This impacts whether you stay in business or not.”
- Chris Timm

You need to know how much your engineers are costing you when you work for a client. The burden rate is the cost of the engineer, so if you do 1 hour of work at $100 and the engineer costs you $20, your profit is $80. That’s the truest reflection of how much the project is worth, minus the miscellaneous costs involved in project delivery. And there are several ways to calculate burden rates.

Calculating burden rates: The good, the bad, and the ugly

The GOOD

The “Good” way calculates the direct and the associated labor costs. This is the best way to measure the burden on business.

The other good way is to calculate the total burden rate by adding benefits as a percentage of the gross wage per hour. Here are a couple of examples showing how.

The BAD

The “Bad” way of calculating burden costs is measuring everything to the Nth degree - the desks, the sticky notes, the coffee cups, and the number of stars in the sky!

Lowering burden expenses can boost your balance sheet, no doubt. Small businesses are usually encouraged to tighten their purse strings as their scope to experiment relies on how dependent they are on external sources for money. But, it won’t help here, when you’re calculating “people cost”. Spending on people is not reckless, up until a certain point. They make your business. Or break.

The UGLY

The "Ugly" way does not consider the additional costs associated with an employee. 

This can sweep a lot of crucial details under the rug. Here the burden rate is simply based on working out the hourly rate by dividing by the number of weeks in a year and the number of working hours in a week to get the employee’s hourly rate.

But profits are unpredictable. The tides are always changing. There are too many costs to account for, too many moving parts, and next to zero visibility into what’s happening. 

Unburden your business with a PSA

Starting a business costs you money. Driving profitability costs more. Getting the basics right makes all the difference. And once you do, it is just a matter of scaling the success. While it may seem like profitability is simply having more income than liabilities, it’s not that simple. Put a premium on the burden rate to make informed decisions, securing your financial predictability and posture. And put a premium on a PSA tool...

A PSA tool brings finance, accounting, projects, and people together under one ecosystem, giving a snapshot of your organization’s financial state at any given point. 

The ability to track projects in real-time, expenses involved, and the corresponding ROI makes PSA the ultimate go-to for MSP business owners to take stock of their finances and drive improvement efforts. If you’re on the fence about getting a PSA, this is your sign.

What makes SuperOps the best PSA solution?

SuperOps is a leading PSA solution because it combines PSA and RMM into a single, unified platform, eliminating the need for multiple disconnected tools. It manages ticketing, project management, client management, and billing all in one place, giving MSPs a clear, organized view of their operations.

The platform’s AI-driven automation handles routine tasks like ticket assignments, follow-ups, and status updates, reducing manual work. It also provides insights from ticket data, helps prioritize critical issues, and allows customizable workflows for consistent task execution.

SuperOps is user-friendly, with a modern interface that streamlines project management, time tracking, billing, and resource scheduling. Its client and asset management tools give a 360-degree view of customers and generate detailed reports to support informed decision-making.

With its focus on efficiency, scalability, and profitability, SuperOps helps businesses improve operations while being easy to deploy without external consultants, making it ideal for growing MSPs.

Start your free trial.

Frequently asked questions

Is burden rate the same as overhead rate?

No, burden rate and overhead rate are related but not identical. The burden rate measures the total cost of employing a worker, including salary, benefits, taxes, and indirect expenses. Overhead rate focuses more broadly on all indirect business costs, such as rent, utilities, and administrative expenses, not tied specifically to individual employees.

How do you calculate the burden rate?

To calculate the burden rate, add all indirect employee-related costs- benefits, payroll taxes, insurance, training, and overhead- to their base salary. Then divide the total indirect costs by the base salary and multiply by 100 to get a percentage. This percentage represents the additional cost of employing that person beyond their direct wages.

Why does the burden rate matter for MSP pricing and profitability?

The burden rate helps MSPs understand the full cost of employing staff, ensuring pricing covers both direct and indirect expenses. It allows accurate service pricing, better profit margin calculations, and informed business decisions. Without accounting for the burden rate, companies risk underpricing services and hurting profitability.

Which costs are included in the burden rate vs. excluded?

Included costs are payroll taxes, benefits, training, overhead, and miscellaneous employee-related expenses. Excluded costs are direct project or material costs, like subcontractor fees, software licenses billed to clients, or hardware purchases. Burden rate focuses on internal labor-related expenses, not the cost of goods or services delivered externally.

What counts as “productive hours” when computing burden rate?

Productive hours are the time an employee spends on billable or revenue-generating work. It excludes holidays, paid leave, sick days, and administrative or non-billable tasks. Calculating burden rate using productive hours ensures the cost per billable hour accurately reflects the true expense of labor, which is essential for pricing services and maintaining profitability.

How do benefits, payroll taxes, and insurance impact the burden rate?

Benefits, payroll taxes, and insurance increase the total cost of employment, directly raising the burden rate. Including these costs ensures the business accounts for the real expense of each employee, helping MSPs set accurate pricing, forecast budgets, and make informed decisions about hiring and workforce planning.

Should PSA/RMM and security tool costs be in the burden rate or COGS?

PSA/RMM and security tool costs are generally part of the burden rate if they are required to support staff operations internally. If these tools are directly consumed in delivering client services, they may be included in COGS. The key distinction is whether the cost supports employees broadly or is tied to billable client work.

What’s the difference between burden rate and billable rate?

Burden rate reflects the total cost of employing a staff member, including salary, benefits, and overhead. Billable rate is what a company charges clients per hour for that employee’s time. The billable rate must cover the burden rate plus profit margin and any additional business costs to ensure sustainable profitability.