If you're an employer, entrepreneur, or startup owner, you’re probably offering additional perks on top of paying your employees’ salaries.
In this article, you’ll learn how to calculate fringe benefits and the advantages of offering them.
Specifically, we cover:
Final Thoughts: How To Calculate Fringe Benefits and Why To Offer Them
Fringe benefits are additional perks employers provide to ensure employee satisfaction. These extra perks include things like educational assistance, company vehicles, and subsidized meals. They may be given to all employees or to select employees at the executive level.
Unlike statutory benefits, which are required by law, fringe benefits are provided at the employer’s discretion.
According to the Internal Revenue Service (IRS), fringe benefits take the form of a payment provided to anyone for performing a service.
There are two types of fringe benefits: taxable and nontaxable. Let’s explore the differences between them.
Taxable fringe benefits can come in the form of:
Suppose the person rendering the service is your employee. In that case, the fringe benefits are subject to employment taxes — including income tax withholding, Social Security, and Medicare (FICA) taxes. They would need to be declared on Form W-2.
If the person rendering the service isn't your employee, the benefit isn't subject to employment taxes. The person who rendered the service will have to report the benefit in one of the following tax return forms.
Nontaxable (or tax-free) fringe benefits aren't factored into the taxable income of an employee. As no taxes need to be paid on them, that also means nothing needs to be withheld.
According to the IRS, nontaxable fringe benefits can come in the form of:
De minimis (minimal) benefits are a special category of nontaxable benefits that have such a comparatively low cost that tracking them is unreasonable or impractical.
They aren't included in an employee’s gross income or withheld in payroll taxes. Here are a few examples of de minimis benefits:
On the face of it, fringe benefits may come across as just rewards for employees. But they also benefit employers.
Research has shown that offering fringe benefits leads to:
When employees stay, companies minimize attrition rates while maintaining productivity.
And some fringe benefits, such as health insurance coverage, educational assistance, and retirement contributions, can lead to savings on your tax bill.
Now that you understand the advantages of offering them, let’s talk about why you should learn how to calculate fringe benefits.
Calculating the cost of offering fringe benefits to your employees provides a couple of insights:
Answering these questions early on helps you make good and sustainable financial decisions that’ll lead to lasting returns for you and your employees well into the future.
The easiest way to calculate fringe benefits is with the fringe benefit rate. The fringe benefit rate is the ratio of benefits and wages an employee receives relative to their regular income. It’s most often represented as a percentage.
Calculating this rate allows you to see how much more your company is paying an employee on top of their base salary.
To calculate the fringe benefit rate for an employee, we’ll use a simple formula: Divide the annual cost of all fringe benefits paid by the employee’s annual wage and then multiply by 100.
For example, if you paid approximately $5,000 in fringe benefits to an employee whose annual salary was $50,000, the fringe benefit rate for this employee would be 10%. In other words, on average, you’re paying an additional 10% of this employee’s wage to them in the form of fringe benefits.
The fringe benefit rate depends on whether your employee is hourly or is paid an annual salary.
Ideally, calculating the total fringe benefits an employee receives should be pretty simple. All you need to do is add up the total amount of benefits you paid to your employee, right?
Yes and no.
Yes, if the fringe benefits’ fair market value (FMV) is the same as its cost. For instance, if you give your employee commuter benefits of $250 per year, its value is $250.
If your company offers health insurance at $1,200 per year, life insurance at $300 per year, and commuter benefits at $250 per year, the total cost of fringe benefits would be $1,750.
But calculating the FMV — and, by extension, the total fringe benefits — becomes more complex when you give your employees benefits with subjective value. For example, a company car.
If your employee uses it purely for business, you don't have to include it in your employee’s taxable income. But if your employee uses the car for both business and personal use — say 20% of the time, it’s for personal use — the personal portion is considered taxable income.
You can consult the IRS’s Fringe Benefit Guide for ways to calculate the FMV of various benefits.
Calculating fringe benefits for salaried employees is relatively simple.
For example, let’s say an employee’s annual salary is $50,000. Their total fringe benefits are equal to $11,900, broken down as follows:
Their fringe benefit rate would be:
Fringe benefit rate = ($11,900/$50,000) x 100 = 23.8%.
In addition to this employee’s regular salary ($50,000 per year), they’re receiving an additional 23.8% of their income in the form of fringe benefits.
A 2022 Bureau of Labor Statistics report shows average fringe benefit rates range from 22% to 32.7%, depending on the industry. Private industry workers are on the lower end, while government workers are on the higher end.
The fringe benefit rate doesn’t include legally required benefits, which make up around 5.4% to 7.5% of the total compensation package.
To determine the fringe benefit rate for hourly employees, you’ll need to perform additional calculations to get their annual wage.
You can get the annual wage by multiplying the hourly wage by the number of hours worked annually.
For example, let’s say your employee receives $25 per hour. They work 40 hours a week, 50 weeks a year. Their annual wage is $25 x 40 x 50 = $50,000.
If the total cost of their fringe benefits equals $12,500, their fringe benefit rate is:
Fringe benefit rate = ($12,500/$50,000) x 100 = 25%
Fringe benefits for hourly workers don't include allowances and premiums paid, such as overtime pay and holiday pay.
As a form of indirect compensation, fringe benefits are a great way to retain valuable employees, improve overall job satisfaction, and attract top talent to your business.
Employers should familiarize themselves with industry-provided fringe benefits and prevailing market rates. The higher the fringe benefit rate, the more attractive the benefits plan becomes to potential hires.
Want to learn more about what fringe benefits make sense for your business? We want to help!