If you are an employer, you probably give fringe benefits to your employees. There are several fringe benefits out there like health insurance, employee stock options, etc. These fringe benefits can affect the fringe benefit rate.
This means it’s important to know how to calculate fringe benefits and their rate, which can include the per-hour breakdown for employees who are hourly workers.
What Is A Fringe Benefit?
"Fringe benefits are the benefits that employers give their employees in addition to the employee's annual salary."
Business partners and independent contractors can also receive tax-free fringe benefits. A fringe benefit is a type of salary apart from money given for the performance of services by an employee.
If a fringe benefit is given in the form of money like reimbursement or bonus for travel, it'll be subject to income tax. Some examples of fringe benefits are:
- Company car
- Health insurance
- Educational assistance
- Life insurance coverage
- Employee stock options
- Childcare reimbursement
Fringe benefits given to employees are taxable income for them unless tax law excludes them from taxation. Taxable fringe benefits must be included as income on the employee's W-2. Taxable fringe benefits are also subject to withholding.
Fringe benefits are generally taxable, but some are tax-free. Taxable fringe benefits include paid time off, personal use of a company car, and bonus pay. Some examples of tax-free fringe benefits are:
- Accident insurance
- Disability insurance
- Achievement awards
- Health savings accounts
- Dependent care assistance
- Group-term life insurance up to $50,000
Remember that some fringe benefits are only tax-free in specific situations. Some taxes may apply — for example, some fringe benefits are only exempt from FICA tax.
What Is A Fringe Benefit Rate?
"A fringe benefit rate is the percentage of an employee's wages relative to the fringe benefits the employee receives."
How to calculate fringe benefit rates: Add the annual cost of all benefits and payroll taxes paid and divide by the annual wages paid. Employers can use the fringe benefit rate to determine the total cost of labor per employee.
For example, if the total fringe benefits paid are $25,000 and the salary paid is $100,000, the fringe benefit rate will be 25%. Here are examples of fringe benefits that'll be included in the numerator of this calculation:
- Life insurance
- Health insurance
- Disability insurance
- Unemployment insurance
- Pension plan contributions
- Workers' compensation insurance
- Employer portion of Medicare tax
- Employer portion of Social Security tax
A fringe benefit rate shows how much an employee costs your business beyond their base salary. What percent of salary is fringe benefits? This varies, based on employer offerings, and employee pay and which programs they choose to opt into. Under the Bureau of Labor Statistics, the average fringe benefit rate is 30%.
How To Calculate A Fringe Rate Benefit?
The calculation of the fringe benefit rate is a simple one. Understanding the fringe benefit rate gives you a better picture of the employee's actual cost.
Employers calculate the fringe benefit rate to evaluate the percentage of an employee's hourly wage compared to the benefits they receive. To calculate the employee's fringe benefit rate:
- Add together the cost of an employee's fringe benefits for the year
- Divide it by the employee's annual salary
- Multiply the total by 100 to determine the percentage of fringe benefit rate
Use the following formula to calculate the fringe benefit rate of an employee:
Fringe Benefit Rate = (Total Fringe Benefits / Annual Salary) X 100
When you add up your employee's total fringe benefits, remember to include all of their fringe benefits like:
- Life insurance
- Health insurance
- Disability insurance
- Adoption assistance
- Unemployment insurance
- Pension plan contributions
- Employee educational assistance
- Employer portion of Medicare tax
- Workers' compensation insurance
- Employer portion of Social Security tax
Examples Of Fringe Benefit Rate Calculation
Here are some examples of the fringe benefit rate calculation for salaried employees and hourly employees:
Fringe Benefit Rate Calculation For A Salaried Employee
Suppose your salaried employee earns $80,000 per year. The total annual fringe benefits of the employee are $20,000 that are broken down as:
- $1,300 for unemployment tax
- $4,080 for retirement benefits
- $1,000 for worker's compensation
- $1,160 for employer portion of Medicare tax
- $4,960 for employer portion of Social Security tax
- $7,500 for employee's life, disability, and health insurances
Divide the annual fringe benefits of an employee of $20,000 by their annual wages of $80,000 as follows:
$20,000 / $80,000 = 0.25
Then, multiply the total by 100 to determine the fringe benefit rate percentage as follows:
0.25 X 100 = 25%
The fringe benefit rate for this salaried employee is 25%. It means that your business is paying an additional 25% to the employee besides their base wages.
How to Calculate Fringe Benefits Per Hour
To determine the employee's total hourly rate, divide the employee's annual wages by the number of hours per week and weeks per year. Use the following formula to calculate the employee's total hourly rate:
$80,000 / 40 hours per week / 52 weeks per year = $38.46
So, the employee's total hourly rate is $38.46. Multiply the total hourly rate by your fringe benefit rate of 0.25 as follows:
$38.46 X 0.25 = $9.61 (hourly cost of fringe benefit)
Next, add this total to the hourly rate to determine the employee's total salary plus fringe benefits per hour as follows:
$9.61 + $38.46 = $48.07
This salaried employee's total hourly rate, including the fringe benefits, will be $48.07
Fringe Benefit Rate Calculation For An Hourly Employee
Suppose you have a full-time hourly employee who is paid $25 per hour. The hourly employee has the following annual fringe benefits:
- $800 for unemployment tax
- $2,200 for retirement benefits
- $722 for worker's compensation
- $754 for employer portion of Medicare tax
- $3,224 for employer portion of Social Security tax
- $3,740 for employee's life, disability, and health insurances
So, the total fringe benefits of an hourly employee are $11,440. Divide the total fringe benefits by the annual wages of an employee.
To determine the employee's annual salary, multiply the hourly rate by the number of hours worked per week and the number of weeks in a year as follows:
$25 hourly rate X 40 hours X 52 weeks = $52,000 in annual salary
($11,440 / $52,000) X 100 = 22%
The fringe benefit rate for this hourly employee is 22%. It means that your business is paying an additional 22% to this hourly employee beyond the employee's salary.
