A labor burden rate is everything you pay on top of an employee’s base wage just to have them on your payroll. A worker making $25 an hour doesn’t cost you $25 an hour. Once you factor in payroll taxes, insurance, benefits, and other employer-paid obligations, that same worker costs somewhere between $31 and $37 an hour. The difference is your labor burden, and it typically adds 25-50% on top of base wages depending on what you offer.

Payroll taxes are the biggest mandatory piece. You pay 7.65% of wages for FICA, which covers Social Security and Medicare combined. Federal unemployment tax (FUTA) adds roughly 0.6% after credits. Arizona state unemployment tax (SUTA) varies based on your experience rating, with new employers starting higher and established businesses generally paying less as they build history.

Workers’ compensation insurance is where construction really diverges from other industries. Arizona requires it, and rates for construction trades are among the highest you’ll find. Depending on the classification of work, you might pay anywhere from $5 to $20 or more per $100 of payroll. A framing crew costs significantly more to insure than office staff on the same project.

Health insurance matters if you’re contributing to employee coverage. Even a modest employer contribution of $300-$500 per month per employee adds a meaningful hourly cost when you spread it across hours worked. Paid time off is another real cost that gets overlooked. One week of paid vacation means you’re paying for 52 weeks but getting 51 weeks of productive work, which adds roughly 2% to your burden on its own. Union benefits like pension contributions and training fund payments can push the rate even higher on union jobs.

To calculate your rate, add up all employer-paid costs for a given period and divide by total base wages for that same period. If you paid $100,000 in base wages and spent $35,000 on taxes, insurance, and benefits, your burden rate is 35%. That $25/hr worker actually costs you $33.75/hr.

This number absolutely must show up in your job estimates. If you’re bidding based on base wages alone, you’re underbidding every job by 25-50%. On a project with $50,000 in labor, that’s $12,500 to $25,000 in costs you didn’t account for. Do that on a few projects and you’ll be busy but losing money. Proper construction job costing tracks burdened labor rates by project so you can see actual profitability rather than an inflated version of it.

Recalculate your burden rate at least once a year or whenever your costs shift. Workers’ comp renewals, insurance plan changes, and SUTA rate adjustments all move the number. The rate you used last year might not be accurate today. If you’re not sure where to start or your current books don’t break costs down this way, working with bookkeeping services built for contractors can help you get the right numbers into your estimates before you bid your next job.