How to calculate fringe benefits for employees? How to calculate fringe benefits per hour for employees? This guide teaches you everything about calculating fringe benefits and following 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.
You can calculate the fringe benefits of your employees by dividing the total cost of fringe benefits an employee receives by the employee’s annual salary multiplied by 100.
Fringe Benefit Rate = (Total fringe benefits an employee gets / Annual salary of the employee) x 100
This formula seems easy to calculate; however, determining what to include while calculating the employee’s fringe benefit rate is tricky. Read on to learn about calculating fringe benefits and what to include in the calculation. This article teaches everything you must know about calculating fringe benefits and following best practices.
To learn more via video, watch below. Otherwise, skip ahead.
Calculating Fringe Benefit Rate for Salaried 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 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, 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.
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 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.
Looking to know more about fringe benefits to enhance your HR skills and knowledge? Enroll in our top-rated HR certifications to excel in your HR career:
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 fringe benefit rate.
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 become 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.
If you have a fringe benefit rate of 0.096, multiply it by 100. The fringe benefit rate percentage becomes 9.6%.
Calculating 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 to calculate the fringe benefit rate for hourly employees:
Step 1: Determine the Total Cost of Fringe Benefits
To calculate the 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. It also includes health insurance, dental insurance, life insurance, and the employer portion of medicare 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.
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 (40 hours multiplied by 52 weeks). If an hourly employee works overtime, include those hours as well.
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 rate. 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.
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%.
Calculating Fringe Benefit Rate
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 improve 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 if 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 the 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.
5. Decide which Benefits to Offer to Employees
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.
Suppose you have four employees and want to offer them health insurance, dental insurance, and life insurance. Suppose you want to provide health and dental insurance to employee no.1 and health insurance to employee no.2. Put an X mark in front of health insurance and dental insurance for employee 01 and health insurance for employee 02.
If you want to offer just life insurance to employee no.3 and no benefits to employee no.4, put an X mark in front of the life insurance for employee no.3 and no mark in front of employee no.4.
6. Determine Employee Fringe Benefits Package
After you decide which benefits to offer to your employees, the next step is to determine the employee’s fringe benefits package. Determine the cost of each benefit and calculate the total cost of the benefits package.
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).
7. Calculate the Total Fringe Benefits you Offer to All Employees
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.
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).
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.
If you are new to human resources and are looking to break into an HR role, we recommend taking our HR Certification Courses, where you will learn how to build your skillset in human resources, build your human resources network, craft an excellent HR resume, and create a successful job search strategy.