How to Calculate Fringe Benefits
Wondering how to calculate fringe benefits for employees? We are here to help you calculate fringe benefits and follow the best practices.
Fringe benefits are a strategic tool that employers use to attract and retain top talent. Calculating fringe benefits demands from employers to stay compliant with the law while also providing a competitive benefits package to employees.
By offering fringe benefits, employers can provide their employees with additional compensation that offsets their costs of living and working. Fringe benefits create a more positive work-life balance for employees, leading to increased productivity and satisfaction. If you want to learn how to calculate fringe benefits, read this article.
How to Calculate Fringe Benefits Rate for Fixed Salary Employees
The calculation of the typical fringe benefit rate varies depending on whether your employee is salaried or hourly.
Following are the steps you must follow while calculating the fringe benefit rate for salaried employees:
Step 1: Determining the Total Cost of Fringe Benefits
To calculate the fringe benefit rate, first determine the total cost of all taxable fringe benefits that your employee receives. Fringe benefits are the extra perks and amenities that an employer provides in addition to an employee’s regular salary or wage. It includes everything from payroll taxes to paid vacations.
Fringe benefits include benefits, such as health insurance, life insurance, dental insurance, vision insurance, life insurance, and disability insurance. In addition to that, these also include benefits like:
- Employer-sponsored retirement plans
- Child care assistance
- Workers’ compensation insurance
- Tuition reimbursement
- Medicare tax employer portion
- The Employer portion of social security tax
- Employee assistance programs
- Paid vacation days
Some fringe benefits are mandatory by law, while others are offered at the employer’s discretion. Regardless of whether the benefit is required by law or not, you must include them in the total cost of an employee’s fringe benefits. Add up the costs of all benefits that your employees receive.
For example, if your company offers health insurance of $1,600, life insurance of $480, childcare benefits of $1,000, commuter benefits of $120 per year, and disability insurance of $600 per year, the total cost of total fringe benefits will be the sum of all, i.e., $4,800.
Step 2: Determining the Annual Salary of the Employee
Once you determine the total cost of fringe benefits, proceed with the employee’s annual salary. The annual salary is the total amount of money the employee earns in a year. The annual salary depends on several factors, such as the employee’s job title, years of experience, and education level.
Step 3: Dividing the Fringe Benefits Cost by the Annual Salary
After you determine the cost of fringe benefits and the employee’s annual salary, divide both numbers to calculate the employee’s fringe benefit rate.
For example, if there is an employee with an annual salary of $50,000 and the total cost of fringe benefits is $4,800, you divide the cost of fringe benefits by the employee’s salary to get the fringe benefit rate. The fringe benefit rate becomes 0.096 by using the formula for this example.
Step 4: Multiplying by 100
After dividing the fringe benefit cost by the employee’s annual salary, multiply the number by 100 to get the percentage. For example, if you have a fringe benefit rate of 0.096, multiply it by 100. The fringe benefit rate percentage becomes 9.6%.
Steps to Calculate Fringe Benefit Rate for Hourly Employees
The calculation of the fringe benefit rate for hourly employees is different from that of salaried employees. The fringe benefit rate is calculated as a percentage of the hourly wage rate for hourly employees.
Here are the steps you must follow on how to calculate fringe benefits rate for hourly employees:
Step 1: Determine the Total Cost of Fringe Benefits
To calculate the employee’s fringe benefit rate, first determine the total cost of all fringe benefits that your hourly employee receives. For hourly employees, fringe benefits include vacation days, retirement pay, unemployment insurance, worker’s compensation insurance, and the employer portion of social security tax.
The total cost of fringe benefits for hourly employees doesn’t include allowances, premiums, or other benefits. Add up the cost of all fringe benefits to get the total cost.
For example, if hourly employees receive two weeks of vacation pay, the cost of fringe benefits means they get (2 weeks x 40 hours per week x $15 per hour) $1,200 of vacation pay. The additional fringe benefits include health insurance of $600 per year and dental insurance of $300 per year. In this case, the total cost of fringe benefits is $2,100.
Step 2: Determine the Annual Wages of the Hourly Employee
The next step is to determine the annual wages of the employee. You multiply the hourly rate by the number of hours worked in a year. An hourly employee works 40 hours per week.
To calculate the annual salary, multiply the hourly wage rate by 2,080. If an hourly employee works overtime, include those hours as well. For example, If an hourly employee gets $15 per hour, their annual wages are 15 x 2,080 = $31,200.
Step 3: Calculate the Fringe Benefit Rate
Once you have determined the total cost of fringe benefits and the number of working hours in a year, you can calculate the fringe benefit percentage. For this purpose, divide the total cost of fringe benefits by the number of working hours in a year. It will give you the fringe benefit rate as a decimal. To convert it into a percentage, multiply it by 100.
For instance, If the total cost of fringe benefits is $2,100 and the number of working hours in a year is 31,200, the fringe benefit rate is 2,100/31,200 = 0.067. To convert it into a percentage, multiply it by 100. Therefore, the fringe benefit rate will be 6.7%.
Considerations for Fringe Benefit Rate Calculation
Calculating fringe benefits is necessary for employers as it offers them insight into how much money they need to set aside for employee benefits. Let’s learn about the pathway of calculating the fringe benefit rate.
1. Take a Look at the Advantages of Offering Fringe Benefits
When it comes to offering fringe benefits, employers have to consider both the costs and the advantages. For you as an employer, the health and well-being of your employees must be a priority. It is also vital for attracting and retaining competent staff members. Offering fringe benefits improves the morale and motivation of the staff.
Some fringe benefits help employees reduce the taxes they pay. For instance, if an employer offers health insurance, they can minimize the premiums from their taxes. It also ensures the health and safety of the employees.
2. Consider the Disadvantages of Providing Fringe Benefits
Fringe benefits are expensive for employers. They need a significant investment, especially if they offer multiple benefits. Small businesses find it challenging to manage the costs of providing fringe benefits. It is fundamental to think about the long-term effects as some benefits have a significant impact on the company’s finances.
If a small organization offers health insurance, it must pay the premiums. If an employer offers a retirement plan, they must contribute to it. All these costs can add up and put a strain on the finances of small businesses.
3. Create a List of Total Employees with Names
For calculating the fringe benefits you want to offer to your employees, create a list of all your employees. It helps you identify how many employees will benefit from the fringe benefits. Use a spreadsheet or create a list of all the employees on a piece of paper.
4. List Down And Decide Which Fringe Benefits You Want to Provide
Once you have the list of all your employees, identify which fringe benefits you want to offer them. List down the fringe benefits you are willing to provide on the spreadsheet or on a piece of paper you created in the previous step.
Some of the most common fringe benefits include health insurance, dental insurance, vision insurance, life insurance, disability insurance, retirement plans, and paid time off.
After you have created a list that contains the names of employees with possible benefits you can offer, decide which benefits to offer to which certain employees.
You must evaluate the needs of your employees and decide which benefits are the most beneficial for them. Put a mark in front of the benefits an employee receives.
You can offer all the employees the same benefit or different benefits to different employees based on their needs.
6. Determine the Applicable Package and Calculate the Total Fringe Benefits
After you decide which benefits to offer to your employees, the next step is to determine the employee’s fringe benefits package.
For instance, if you are offering health insurance of $300 per month and dental insurance of $100 per month, the total cost of the benefits package will be $400 per month ($4,800 annually).
After determining the fringe benefits package, calculate the employee’s total fringe benefits you offer to all your employees. Add up the cost of all the benefits you provide and divide it by the total number of employees.
For example, suppose you offer health insurance of $300 per month to 2 employees, dental insurance of $100 per month to 1 employee, and life insurance of $50 per month to 1 employee. The total cost of the benefits becomes $450 per month ($5,400 annually). The average fringe benefit rate becomes $225 per month ($2,700 annually).
Final Remarks
Fringe benefits help boost employee productivity which enhances the organization’s growth. Know that offering fringe benefits is a challenging task, and you must understand the method to calculate and implement them. There are several advantages and disadvantages of fringe benefits.
However, you can reduce the downfall by calculating and implementing the program in a step-by-step way keeping in view the state labor rules, the organization’s policies, and target goals.
FAQs
Here are the most frequently asked questions and answers related to calculating fringe benefit rate:
What are fringe benefits?
Fringe benefits are employee benefits provided to employees in addition to their regular salaries or wages. Most fringe benefits are subject to income tax withholding and employment taxes. Some common fringe benefits are health plans, retirement plans, commuter benefits, educational assistance, dental insurance coverage, and family coverage.
How to find the fringe benefits?
Calculating the fringe benefit rate is an easy task to do. Just add the employee’s total fringe benefits cost and payroll taxes, divide it by the yearly salary or wages, and multiply it by 100 to get a fringe benefit rate percentage.
Are fringe benefits considered wages?
Yes, fringe benefits are equivalent to wages. This is because they get added in addition to an employee’s gross income. Furthermore, it indicates that taxes apply to fringe benefits. The method to calculate fringe benefits is the same whether an employee receives a salary or wages.
Are fringe benefits taxable?
Fringe benefits that a company provides to an employee are taxable and must be a part of the recipient’s salary unless the law excludes it.
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