## 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.