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Calculating Total Wages & Fringe Benefits

Accounting Support • Aug 06, 2021
Salary is not the only compensation for employees; Fringe benefits also contribute significantly. They play a vital role in staying competitive by retaining top talent at a company.

Wages are not the only value that companies can provide for employees; Fringe benefits also contribute significantly to a compensation package. These benefits are crucial for companies to stay competitive and help them retain top talent.  

When providing benefits, it is important to correctly calculate your true costs per employee – it isn’t as simple as just adding up their wages. Keeping both fringe benefit costs and wage costs in mind is necessary to consider while figuring a budget or calculating accurate costs, especially for a small business. 

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What do Fringe Benefits include?

Benefit options such as retirement, medical insurance (including dental and vision), premiums, training opportunities, and tuition reimbursement are all included under the fringe benefit umbrella. Any life insurance contributions, long-term disability plans, or other company-paid perks are also part of this category. Sometimes organizations provide other bonuses such as free lunches or massages. 

When calculating wage costs, define what your organization considers fringe benefits and what will be processed as part of the employee’s wages. For example, some companies consider overtime a benefit, while most organizations consider overtime a part of a wage. Likewise, some corporations consider gas and auto allowances as benefits, while many are not allowed to do so. 

How to Calculate Total Wages and Fringe Benefits?

To calculate your total hourly compensation rate, you add the ‘hourly rate’ equivalent of your benefits to the employee’s hourly pay rate.  
 
To find the hourly rate equivalent of your benefits, start by calculating the dollar cost of all intangible benefits that are paid hourly (such as vacation days). These will be the costs at the base hourly rate of your employee without adding any rewards, allowances, or other types of compensation. 

Next, you must find the value of benefits that are paid monthly or yearly. You want to change all these benefits costs to an hourly rate by adding up the annual or monthly amount of each benefit and dividing it by the expected hours worked by the employee. 

With these numbers, you can now calculate your true hourly cost for your employee. 

To find your “benefits load,” you can calculate an employee’s fringe benefits as a percentage of their wages. You can also determine the organization’s average benefit loads in this same way by dividing the benefits cost of all employees by their total wage cost. 

Importance of Calculating Fringe Benefits

Even if not paid as direct income, fringe benefits are considered compensation for the total cost of labor. These numbers can be crucial for calculating your hiring costs and the cost of your current workforce.  

For some companies, such as those working in construction, knowing your fringe benefits costs can help you reach your prevailing wage requirements. Prevailing wage requirements can be met through a combination of your fringe benefit cost and your wages, as long as you are already meeting a minimum wage threshold. 

The Takeaway

While considering wage costs, computing fringe benefits is equally important. You can quickly find the average benefit load of the company by calculating your benefits package cost against the wage costs of each employee. Remember that employers need to pay a minimum level of fringe benefits, and some benefits may be subject to taxation. Don’t forget to check the state laws to determine legal needs for your fringe benefits offerings. 

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