How to Calculate Fringe Benefits
Fringe benefits are a strategic tool that employers use to attract and retain top talent. Calculating finger benefits enables 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 can help offset the costs of living and working. Fringe benefits can also help 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 get / Annual salary of the employee) X 100
This formula seems quite straightforward and easy to calculate; however, determining what to include while calculating the employee's fringe benefit rate can be tricky. Read on to learn about calculating fringe benefits and what to include in the calculation. This guide will teach you everything you need to know about calculating fringe benefits and following best practices.
Calculating Fringe Benefit Rate for Salaried Employees
Calculation of fringe benefit rate varies depending on whether your employee is salaried or hourly. Following are the steps you need to follow to calculate the fringe benefit rate for salaried employees:
Step 1: Determining The Total Cost of Fringe Benefits
To calculate the fringe benefit rate, you first need to 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.
They can include a wide range of benefits, such as health insurance, dental insurance, vision insurance, life insurance, and disability insurance. It also includes other benefits like employer-sponsored retirement plans, child care assistance, workers' compensation insurance, tuition reimbursement, the employer portion of Medicare tax, employer portion of social security tax, employee assistance programs, and 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, it should be included in the total cost of an employee's fringe benefits.
The total cost of fringe benefits varies depending on the types and amounts of benefits your employees receive. You need to 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 would be $4,800.
Step 2: Determining The Annual Salary of The Employee
Once you have determined the total cost of fringe benefits, you must select the employee's annual salary. The annual salary is the total amount of money the employee will earn 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 have determined the cost of fringe benefits and the employee's annual salary, you need to divide both numbers to calculate the fringe benefit rate.
If you have an employee with an annual salary of $50,000 and the total cost of fringe benefits is $4,800, you would divide the cost of fringe benefits by the employee's salary to get the fringe benefit rate. The fringe benefit rate would be 0.096 by using the formula.
Step 4: Multiplying by 100
After dividing the fringe benefit cost by the employee's annual salary, you will need to 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 percentage would be 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. Following are the steps you need to 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, you first need to determine the total cost of all fringe benefits that your hourly employee receives. For hourly employees, fringe benefits include the 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 an hourly employee receives two weeks of vacation pay, the cost of fringe benefits means he/she gets (2 weeks x 40 hours per week x $15 per hour) $1,200 of vacation pay. The additional fringe benefits may also include health insurance of $600 per year and dental insurance of $300 per year. In this case, the total cost of fringe benefits would be $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 have to multiply the hourly rate by the number of hours worked in a year. An hourly employee usually works 40 hours per week. To calculate the annual salary, you need to multiply the hourly wage rate by 2,080 (40 hours multiplied by 52 weeks). If an hourly employee works overtime, you need to include those hours as well.
If an hourly employee gets $15 per hour, his annual wages would be 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 would be 2,100/31,200 = 0.067. To convert it into a percentage, multiply it by 100. Therefore, the fringe benefit rate would 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.
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. As an employer, considering the health and wellbeing of your employees should be a priority. It is also vital for attracting and retaining competent staff members. Offering fringe benefits can help employers 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, the employee may be able to minimize the premiums from their taxes. It also ensures the health and safety of the employees.
Ponder Upon The Disadvantages of Providing Fringe Benefits
Fringe benefits can be costly for employers. They need to be ready to make a significant investment, especially if they offer multiple benefits. Small businesses might find it challenging to manage the costs of providing fringe benefits. Thinking about the long-term effects is crucial as some benefits can have a significant impact on the company's finances.
If a small organization offers health insurance, they need to pay the premiums. If an employer offers a retirement plan, they need to contribute to it. All these costs can add up and put a strain on the finances of small businesses.
Create a List of All Your Employees
For calculating the fringe benefits you want to offer to your employees, you need to first create a list of all your employees. It will help you identify how many employees will be benefiting from the fringe benefits. You can use a spreadsheet or create a list of all the employees on a piece of paper.
List Down The Fringe Benefits You Want To Provide
Once you have the list of all your employees, you need to 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.
Decide Which Benefits To Offer to Employees
After you have created a list that contains the names of employees and the benefits you want to offer comes the step of deciding which benefits to offer to your employees.
You need to evaluate the needs of your employees and decide which benefits will be 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 01 and health insurance to employee 02. Put an X mark in front of health insurance and dental insurance for employee 01 and health insurance for employee 02.
Suppose you want to offer just life insurance to employee 03 and no benefits to employee 04. Put an X mark in front of life insurance for employee 03 and no mark in front of employee 04.
Determine Employee Fringe Benefits Package
After you have decided 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).
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 are offering 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 will be $450 per month ($5,400 annually). The average cost of the benefits will be $225 per month ($2,700 annually).
Josh Fechter is the founder of HR.University. He’s a certified HR professional and has managed global teams across 5 different continents including their benefits and payroll. You can connect with him on LinkedIn here.