Definition of Fringe Benefit Rate
A fringe benefit rate is a percentage that results from dividing the cost of an employee's fringe benefits by the wages paid to the employee for the hours actually worked.
Example of Fringe Benefit Rate
Let's assume that a company operates 5 days a week for 8 hours a day for 52 weeks a year resulting in a total of 2,080 hours per year. Next, let's assume that during the year an employee earns $20 per hour, and is entitled to 25 days or 200 hours off with pay (vacation, holidays, sick days). Therefore, the employee's wages for working on the job will be 1,880 hours per year (2,080 hours minus 200 hours) multiplied by $20 per hour = $37,600 for a year.
Next let's assume the following are the annual costs for the fringe benefits earned by the employee and paid by the employer:
- $4,000 for paid time off (200 hours X $20)
- $7,000 for the employee's health, life and disability insurances
- $2,000 for the employee's retirement benefits
- $1,000 for worker compensation insurance and unemployment tax
- $3,000 for the employer's portion of the Social Security and Medicare taxes
The sum of the above fringe benefit costs paid by the employer is $17,000 for the year.
Dividing the annual fringe benefits cost of $17,000 by the employee's $37,600 of wages for the hours worked, results in a fringe benefit rate of 45.2%. Therefore, when a company pays the employee gross wages of $20 per hour worked, the company's cost is $29.04 per hour. (This is the $20 of gross wages per hour plus the $9.04 fringe benefit cost per hour.) Similarly, the employee is earning $29.04 for every hour worked.