Fringe Benefit Rate: Definition and How to Calculate It

If you’re an employer, you probably offer your employees some additional perks along with a competitive salary. These incentives, known as fringe benefits, are commonly used to attract and retain top talent.

When you want to compare your fringe benefits to those from other businesses, it’s helpful to learn how to calculate a fringe benefit rate.

What is a fringe benefit rate?

The fringe benefit rate is the percentage of an employee’s wages relative to the fringe benefits offered to them. Every employee’s fringe benefit rate can be calculated by comparing fringe benefit costs to the base salary they receive. This rate helps businesses calculate the total cost of an employee.

While fringe benefit rates often vary for each industry, the monthly report by the U.S. Bureau of Labor Statistics (BLS) shows that benefit costs accounted for 30.9% of the total compensation of civilian workers, 29.2% of total compensation in the private industry, and 38% of total compensation in state and local government in September 2021.

11 of the most common fringe benefits

Fringe benefits can play a key role in attracting and retaining talented, enthusiastic, and motivated people and can go a long way in boosting team morale. Let’s look at the 11 most common fringe benefits offered by employers:

1. Health insurance

Health insurance is a critical part of an employee compensation package, which can help keep teams healthy and productive while reducing employees’ financial stress.

The Affordable Care Act (ACA) requires employers with 50-plus full-time employees (or a mix of full-time and part-time employees that’s equal to 50 full-time employees) to offer adequate health care coverage or pay a mandated penalty if any employee receives a premium tax credit to buy their own insurance.

It’s important to note that health insurance is a tax-qualified benefit and is totally free of federal and state income taxes. As an employer, you can also utilize the small business health care tax benefit if you have fewer than 25 employees and pay more than half of your employees’ health care premium costs

2. Tuition reimbursement or education assistance

Upskilling and gaining knowledge are important parts of every employee’s training and, in turn, an organization’s growth.

Retention is a major cause of concern for most employers today. Paying for tuition reimbursement or other educational assistance is one of the most powerful ways to encourage employee loyalty.

A recent study by Gallup found that 65% of employees feel employer-provided upskilling is very important when evaluating new job opportunities. The good news is that money spent by a business on repaying tuition or other education expenses for employees is tax-deductible up to $5,250 per employee each year.

3. Fitness center access

Providing fitness center access is becoming increasingly popular and is a fun and engaging way of letting your employees know that you and your business care about them more than just for the work they do. Many industries today have competitive benefits packages. This element of a wellness program can be an effective way to attract health-minded employees to show them you’re a well-rounded organization.

This benefit can help to create an inclusive company culture, bring employees together, and increase companywide motivation. Having physically active employees can also mean lower health care premiums, higher engagement levels, and better morale.

4. Meals

According to one survey, 85% of employees said having employers take care of their meals would increase their job satisfaction and considered it a major perk. It’s a simple way to show employees their daily contributions and efforts are appreciated.

5. Child care

Child care is often financially and emotionally stressful for working parents, to the point that it may affect their productivity. Supporting employees’ child care needs can help address this issue and start to bridge the wage gap between men and women, moving toward building a more equitable workplace.

Providing child care benefits  gives working parents more flexibility and boosts their efficiency while also allowing businesses to claim tax benefits of up to $150,000 per year across their employee base.

6. Retirement plan contributions

Setting up a retirement or pension plan for your team can be a great step toward helping them plan for a comfortable retirement, going a long way toward giving  employees financial security for their future. A retirement plan can also be an extremely attractive benefit for employees in the present, as their contributions can reduce their current taxable income.

Retirement benefits can help businesses retain employees longer and may also make companies eligible for tax credits.

7. Bonuses

Awarding a bonus is an excellent way to motivate your team and boost morale. It can range from an annual bonus, which is the most common type of bonus, to a signing bonus. Holiday bonuses and profit-sharing bonuses are also popular among employers to boost team morale.

8. Company cars

Driving a company car can make employees’ business travel much easier and, in turn, can boost teams’ productivity and job satisfaction. It’s important to remember, though, that using a company car for business purposes is not considered a fringe benefit, whereas personal use is a taxable fringe benefit.

9. Stock options

Grants of stock options, discounted stock option prices, or other profit-sharing programs can be lucrative fringe benefits that encourage employees to contribute more to a company’s success. Employee stock ownership plans also include some tax breaks for both business owners and their team members.

Employer contributions are generally deductible, up to 25% of the payroll covered by stock ownership plans. Additionally, reasonable dividends paid on employee-owned stock are deductible.

10. Paid time off

Paid time off is compensated time away from work, another indication that a company values its employees. The time can be used by team members for different types of absences, like sick leaves, vacation time, and personal time. Payment for this time off is considered taxable income.

11. Cafeteria plans

Some employers offer flexible benefit cafeteria plans that allow employees to select to receive benefits from multiple categories on a pretax basis. This ability to choose items for personal use can be very valuable to the employee.

How can you calculate a fringe benefit rate?

To calculate the fringe benefit rate, divide the employee’s total fringe benefits by their annual salary and multiply that number by a hundred. The equation looks like this:  

Fringe rate = (Total fringe benefits/Annual wages) X 100

The two elements of the formula

The formula has two elements:

• Total fringe benefits: This is the total cost of all the non-wage benefits given to the  employee throughout the year.
• Annual wages: This includes the total salary the employee draws that year.

This calculation can be applied across the business for an organizational fringe benefit rate by using total benefits and total wages for all employees in the formula.

An example fringe benefit rate calculation

Calculating the fringe benefit rate is the same for a salaried employee and an hourly employee with an added step for converting hourly wages to annual salary.

Fringe benefit rate for a salaried employee

To calculate the benefit rate of a salaried employee, add the annual costs of all fringe benefits offered and divide that number by their annual salary.

For example, if the total fringe benefits are valued at $20,000 and the employee’s annual wages are $100,000, the fringe benefit rate would be:

($20,000/$100,000) X 100 = 20%

Fringe benefit rate for an hourly employee

For an hourly employee, the benefit rate is calculated by adding the annual costs of all fringe benefits offered and dividing it by their annual wages. However, since they’re compensated hourly, you’ll first have to calculate annual salary. Do this by multiplying their hourly rate by the number of weeks (52) in a year and the number of hours worked per week (usually 40).

For example, if their hourly rate is $30 and they work 40 hours a week, their annual wages would be $52,000. Here’s the calculation:

$30 per hour X 52 weeks X 40 hours = $62,400  

Let’s assume the total of their fringe benefits is $13,000. To calculate their fringe benefit rate, divide $13,000 (total fringe benefits) by $62,400 (annual wages) and multiply by 100:  

($13,000/$62,400) X 100 = or 21%

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Retain your best employees with an attractive fringe benefit rate

An attractive fringe benefit rate can help you retain your best employees and hire the most promising talent in your industry. Freelance accountants on Upwork can help you choose the best fringe benefits to grow your business while ensuring you’re making good financial decisions in the process.

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Fringe benefit FAQs

Navigating fringe benefit rates can be confusing, especially since each employee has different compensation and, in turn, a different fringe rate. It’s also important to assess how your choice of fringe benefits can affect your relationships with your employees. Read on for answers to some of the most common questions about fringe benefit rates.

Would payroll taxes be a fringe benefit?

No, payroll taxes aren’t included in fringe benefits because they are required by the government to be paid on your behalf as part of the Federal Insurance Contributions Act (FICA) that includes Medicare taxes and taxes for Social Security programs.

What is workers’ compensation insurance?

Workers’ compensation insurance comprises medical and salary benefits for employees who are injured or fall ill. It’s purchased by businesses and underwritten by insurance companies (though it’s underwritten by publicly supported state funds in some states).

Because it’s required by the government, this insurance isn’t considered a fringe benefit.

How are an employee’s fringe benefits taxed?

Fringe benefits are generally taxed, but you can get significant tax benefits for health insurance coverage, child support, educational assistance, retirement plan contributions, disability insurance, and more.

The Internal Revenue Service (IRS) offers a detailed guide on fringe benefits for employers. Note that the taxable fringe benefits paid by the employer to an employee must be included in the employee’s annual W-2 statement. If you’re also paying taxable fringe benefits to independent contractors, you must report it on Form 1099-NEC.