Employers will calculate a fringe benefit rate to determine the percentage of an employee’s hourly wage relative to the fringe benefits they receive. That, in turn, allows an employer to see the actual cost of that employee to the company, beyond their base salary/wages. (If you’re not sure what a fringe benefit is, click here.)
The calculation is a simple one: just add up the cost of the fringe benefits for the year and divide it by the employee’s annual salary. Then, multiply by 100 to get the percentage.
Here’s the equation:
(Sum of All Fringe Benefits / Annual Salary) x 100 = Fringe Benefit Rate (%)
So, if we determined that an employee’s fringe benefits add up to $10,000, and their base wages are $50,000 year, then the fringe benefit rate would be 20 percent.
(10,000 / 50,000) x 100 = 20
Let’s break that down into hourly rate. Assuming a 40-hour work week, at $50,000 a year, that employee is paid around $24.04 an hour. With a fringe benefit rate of 20 percent, it means the employer actually pays an additional $4.81 on top of that base salary (20 percent of 24.04 is about 4.81), which results in a $28.85 hourly rate.
Understanding the fringe benefit rate gives the employer a better picture of the actual cost of the employee.
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