A fringe benefit rate is the cost of an employee's benefits divided by the wages paid to an employee for the hours working on the job. The following is a sample calculation of the fringe benefit rate for a hypothetical, full-time employee with a wage rate of \$20 per hour.

Let's begin by assuming that a company operates 5 days per week for 8 hours per day for 52 weeks per year—a total of 2,080 hours per year. Let's also assume that each year the employee is entitled to 15 days of paid vacation, 8 paid holidays, and 5 paid sick days. This amounts to 28 days of 8 hours each, or 224 hours per year that the employee is paid when not on the job. Therefore, the employee's wages for working on the job will be 1,856 hours per year (2,080 hours minus 224 hours) times \$20 per hour = \$37,120 for a year.

Next let's compute the cost of the hypothetical fringe benefits earned by the employee. For the paid vacation, holidays and sick days the annual cost is \$4,480 (224 hours not on the job times \$20 per hour). Let's also assume that the employer pays the following annual costs for the employee: \$7,200 of the employee's health, life and disability insurance; \$2,000 for the employee's retirement benefits; \$1,100 for worker compensation insurance; \$210 for unemployment insurance; and \$3,182 (2,080 hours X \$20 X 7.65%) for the employer's portion of the Social Security and Medicare taxes. The sum of these costs for employee benefits is \$18,172 per year.

The hypothetical amounts shown above result in a fringe benefit rate of 49%. This is \$18,172 of annual benefits divided by the \$37,120 of wages earned while working on the job.