How To Calculate Fringe Benefits - Our Comprehensive Guide

Fringe benefits have become a staple in employers’ recruitment strategies, but what exactly are they? And, more importantly, how do you calculate them?

Calculating fringe benefits can feel overwhelming, especially if you’re unsure how to go about it and don’t know which benefits qualify or what calculations to use. 

Well, that’s where we come in. In this article, we’ll cover all there is to know how to calculate fringe benefits for employers. If you’re an HR manager, business owner, or employer, this one is for you! 

What Are Fringe Benefits?

Let’s start with the basics. What are fringe benefits? And why are they so important and desirable? 

Fringe benefits are essentially perks that employers offer their employees in addition to their salaries or wages. These could be things like life insurance, health insurance, educational assistance, and retirement benefits. 

Now, while a large majority of companies offer fringe benefits, some are better than others. Depending on the company, employees could also enjoy perks like employee meals, a free cafeteria, and memberships to fitness centers. 

In general, there are two kinds of fringe benefits: taxable fringe benefits and non-taxable fringe benefits. It is recommended that your company offer a combination of the two. 

Contrary to popular belief, most fringe benefits are taxable. Since fringe benefits are considered an additional income on top of your regular income, it is taxed in most cases and should be added to your tax forms. 

Examples of taxable fringe benefits include bonuses, employer-provided vehicles, and contributions towards a retirement fund or life insurance policy. 

On the other hand, there are also non-taxable fringe benefits. As the name implies, these benefits are tax-free. Examples include employee discounts, business-related frequent flyer miles, and access to a company fitness center. 

While it is up to you as the employer to choose which fringe benefits your employees enjoy, some are required by law. These are fringe benefits that employers are obligated to provide. For example, benefits like worker’s compensation, unemployment insurance, and medical leave are all benefits that employers are legally bound to provide.

How Do These Benefits Work?

Fringe benefits are commonly offered in the form of service, property, cash, or a cash equivalent. It could also take the form of non-tangible benefits like using the company car, being offered resources like a laptop, or being provided insurance coverage like life or medical insurance.

As mentioned, the employer decides which benefits to offer their employees. Some of these are legally required, but for the most part, the employer makes these decisions. Fringe benefits might also differ depending on the position the employee holds.

For example, a high-ranking supervisor might have more benefits than a temp employee. In addition, permanent employees are more likely to have better benefits than employees on contract. 

The Importance Of and How To Calculate Fringe Benefits

Being able to calculate the fringe benefit rate is an essential part of running a business. 

No matter the company or industry, employers will have similar reasons for calculating fringe benefits. However, the aims might be different. 

For example, as an employer, you will need to ensure that the benefits you offer are up to market standard and are competitive. This will help you attract new talent and ensure that your current employees are happy, reducing turnover. 

Offering great benefits is one of the best ways to show your employees that you value them and care that they are happy and satisfied. Happy employees are 13% more productive, after all, so this is very beneficial to your business. 

The easiest way to determine whether your fringe benefits are up to scratch is by calculating the fringe benefit rate. Then, compare the numbers to what other companies offer and the market standard. 

What Is A Fringe Benefit Rate?

The fringe benefit rate is a percentage of the employee’s wages or salary relative to the fringe benefits offered by the employer. 

Knowing this number is incredibly helpful since it helps you figure out how much your employees cost your business on top of their salaries. As such, it allows you to determine how many employees you can afford to employ and which benefits you are able to provide them with. 

How To Calculate The Rate 

While it might seem complicated at first glance, calculating the fringe benefits rate is actually very simple and straightforward.

All you need to do is add up the annual cost of the employee’s fringe benefits (including payroll taxes) and then divide this amount by the employee’s salary or wage for the year. Next, you need to take that number and multiply it by 100. 

That gives you the fringe benefits rate percentage.

Here is the calculation:

When calculating the total fringe benefits, don’t forget to include unemployment insurance, health insurance, pension plan contributions, and any other benefits you offer. 

Example For Salaried Employees 

Let’s say that an employee earns an annual salary of $80,000, and your total fringe benefits total around $20,000 annually. 

A simple calculation would be:

$20,000 / $80,000 = 0.25

Then multiply by 100:

0.25 X 100 = 25%

So, the fringe benefit rate for this employee would be 25%. This means that your company is paying an additional 25% to the employee on top of their base salary. 

Example For Hourly Employees

Let’s say you’re currently paying your employees around $35 per hour, and you offer fringe benefits that total to around $10,000 annually. 

You’ll need to divide the total cost of the benefits by the annual wages of the employee. So if your employee works for around 40 hours a week, the calculation would be:

$10,000 / (($35 x 40) x 54 weeks)

$10,000 / (1400 x 54)

$10,000 / 75,600

= 0.13

Then multiply by 100 to get the percentage:

0.13 x 100

= 13%

So, the fringe benefit rate of this employee would be 13%. 

Related: A Complete Guide To Fringe Benefits

Considerations For Employers 

Here are a few considerations for calculating fringe benefits:

1. Consider Both The Advantages and Disadvantages Of Offering Fringe Benefits

If you’re an employer and are thinking about offering fringe benefits, an excellent place to start is to research the pros and cons of providing fringe benefits. For example, offering a 401(k) plan to your employees can be quite expensive. However, it is also a common benefit that most companies offer, as employees genuinely value it. 

2. List All The Possible Fringe Benefits You Offer

If you already offer fringe benefits, list them. If you’re thinking about providing fringe benefits, list the benefits you’d like to put on the table. 

This can help you calculate the total cost of the fringe benefits and figure out whether it works with your budget. 

3. Figure Out The Value Of Each Employee’s Fringe Benefits Package

The benefits will vary depending on the role and position each employee holds. This can make it a bit tricky to calculate the fringe benefit rate. 

To simplify things, try to figure out each employee’s fringe benefits by checking employment contracts. 

Once you have all the information you need on hand, it is time to calculate the total value of the fringe benefits you offer. This shouldn’t be too complicated, and it is essentially the first step to calculating the fringe benefits rate.

In Summary

Calculating the fringe benefit rate can be quite overwhelming, especially if you have multiple employees who have different fringe benefit packages. But, it doesn’t have to be! 

Our advice when approaching fringe benefits is to keep your records in order and up to date. Having the necessary figures on hand makes your job much easier and makes figuring out the fringe benefit rate simple. 

For more information, be sure to check out our complete guide to fringe benefits.