How to Calculate Fringe Benefits: A Comprehensive Guide
Offering benefits to your employees can bring several advantages. You can attract better talent, and your satisfied employees are likely to be more productive. This can be very beneficial for business operations.
Some benefits you must offer—but you have the flexibility to offer a wider range depending on the type of business you operate.
But where should you start? And what do you need to know about fringe benefits?
For instance, does it matter if it’s an hourly rate when it comes to an employee’s total fringe benefits? Or does it matter how many employees you have? Don’t worry, we created this comprehensive guide to answer all your questions.
Read on to learn all about offering fringe benefits. We’ll dive into how they work, what a fringe benefit rate is, how to calculate it, and some examples.
Table of Contents
What Is a Fringe Benefit?
A fringe benefit is a specific type of benefit that employees receive on top of their normal wages or salaries. It can apply to more than just part-time or full-time employees. Independent contractors and freelancers are also eligible for certain fringe benefits.
Some of the most common fringe benefits include:
- The use of a company car
- Employment stock options
- Health insurance coverage
- Life insurance coverage
- Childcare reimbursement
- Educational assistance
- Disability insurance
- Retirement benefits
- Pension plan contributions
- Bonus pay
- Paid time off
- Workers’ compensation insurance
- A portion of the Social Security tax
It’s also important to remember that only certain types of fringe benefits are taxable. Others are going to be non-taxable. For example, a non-taxable fringe benefit includes the likes of long-term life insurance.
Most fringe benefits are a certain percentage of an employee’s wages and are relative to the benefits they receive in return.
For example, let’s say that you have an employee who earns $100,000 per year. The fringe benefits that they receive total $25,000. This means that their fringe benefit rate would total 25%.
To help keep things simple, fringe benefits are essentially perks that you would offer your employees. It can all depend on the specific company, but some benefits are going to be better than others.
On top of the examples listed above, other types of benefits could include employee meals or a membership to a fitness center. Also, keep in mind there are certain fringe benefits you can choose to offer, while others are required by law.
Good examples of required fringe benefits are workers’ compensation insurance and unemployment insurance.
How Do Fringe Benefits Work?
As we mentioned above, as an employer, you for the most part have the choice of which benefits to offer. More often than not, these benefits come in the form of cash or a cash equivalent, a service, or property.
They could also be non-tangible benefits. Some of the most common types include insurance coverage or being able to use a company vehicle.
The type or range of benefits might also relate to the specific type of position an employee has.
Higher-ranking employees could receive a wider range of benefits. A permanent employee will also likely receive a better selection of benefits compared to a contract employee.
As an employer, you would select the fringe benefits your employees would receive. Then as your employees do their jobs they become eligible to receive the benefits in return for their work.
How to Calculate Fringe Benefits
Calculating fringe benefits is a standard function of operating a business with employees. And it doesn’t matter the type of company or the industry you operate in. To calculate fringe benefits for your employees, you only need to follow a few simple steps.
First, add up the total cost of the benefits that an employee receives. Then add up the total cost of the payroll taxes paid.
After that, you just need to add those amounts together and divide them by the total annual wages the employee was paid.
Being able to also calculate the fringe benefit rate will give a much clearer picture of how much everything costs. More on this directly below.
What Is a Fringe Benefit Rate?
Fringe benefit rates are specific percentages of the benefits received in relation to the employee’s salary or wages. Understanding these calculations will provide you with a ton of valuable information. You’ll also get great insights into business costs.
By calculating fringe benefit rates, you can make more informed business decisions when it comes to the number of employees you can hire. This will help you figure out the number of benefits you can provide them.
How to Calculate The Rate
The good news is that calculating the fringe benefit rate is very easy to do. All you need to do is add the total cost of the benefits and payroll taxes the employee receives.
Next, divide that number by the wages or salary the employee earns in a year. Finally, multiply the number you generate by 100 to get a percentage.
The formula would look like this:
It’s important to remember to include all of the necessary benefits in the calculation. These might include the likes of pension plan contributions or health insurance. You may also include car insurance or unemployment insurance.
Examples of Fringe Benefit Rate Calculation
Want to get a good understanding of an example of fringe benefit rate calculations? We’ve got you covered. Here, we will take a look at examples for both hourly and salaried employees.
Let’s first look at an example for hourly employees.
One of your employees earns $25 per hour and receives a total of $10,000 in fringe benefits. If they work a total of 40 hours per week for the entire year, you can calculate the fringe benefit rate. The calculation would look like this:
$10,000 / ([$25 x 40] x 52 weeks)
$10,000 / (1000 x 52)
$10,000 / 52,000
= 0.19 x 100
= 19% fringe benefit rate
To calculate a salaried employee’s fringe benefit rate, the calculations are fairly similar. Let’s say one of your employees earns an annual salary of $75,000 per year. They also receive around $18,000 per year in fringe benefits. The calculation would look like this:
$18,000 / $75,000 = 0.24
0.24 x 100 = 24% fringe benefit rate
Ultimately, this would mean that you pay an additional 24% to your employee on top of their annual base salary.
It might seem as though determining fringe benefits and calculating them can be an overwhelming process. However, it can be a fun process to implement legally-required benefits and benefits that your employees can receive on top of their wages.
Fringe benefits can range quite a bit. It all depends on the individual company. For example, your fringe benefits might include car insurance or life insurance. Or maybe they’ll include pension plan contributions and workers’ compensation insurance.
You can also include additional perks if you wish. These might be memberships to fitness centers or bonuses paid for meeting business targets.
FAQ on Fringe Benefits
Are Fringe Benefits Deducted From Paychecks?
No, fringe benefits are on top of the normal hourly wage or salary an employee earns. A fringe benefits package can be a great option for a salaried employee.
How Do I Avoid Fringe Benefits Tax?
One way to avoid fringe benefits tax is to replace the benefits with a new cash salary. If you do this, it’s important to consider your total taxable income and the overall fringe benefit percentage.
Are Fringe Benefits Considered Wages?
In many ways, yes, we consider fringe benefits as wages. This is because they get added on top of an employee’s regular gross income. Also, it means there can be taxable fringe benefits. We calculate an employee’s fringe benefit rate percentage the same if they’re an hourly employee or salaried employee.