Fringe benefit rate definition
/What is a Fringe Benefit Rate?
A fringe benefit rate is the proportion of benefits paid to the wages paid to an employee.
How is the Fringe Benefit Rate Used?
A fringe benefit rate may be used in several ways, as noted below:
For grant applications or contracts. A fringe benefit rate may be used to justify labor costs to funding agencies or clients.
For budgeting. A fringe benefit rate can be used to provide a clearer picture of total employee-related costs.
For cost comparisons. A fringe benefit rate may be part of a labor and benefits cost comparison across departments or projects.
For an outsourcing analysis. A fringe benefit rate can be used to examine the total cost of labor, especially when determining whether to outsource work or to shift a company location. Thus, if the fringe benefit rate is quite high, it could make more sense to outsource work, thereby avoiding the incurrence of large additional amounts of fringe benefits.
How to Calculate the Fringe Benefit Rate
The fringe benefit rate is calculated by adding together the annual cost of all benefits and payroll taxes paid, and dividing by the annual wages paid. As an example, if the total benefits paid were $25,000 and the wages paid were $100,000, then the fringe benefit rate would be 25%.
What Benefits are Included in the Fringe Benefit Rate?
Examples of the benefits that would be included in the numerator of this calculation are:
Disability insurance
Employer portion of Medicare tax
Employer portion of social security tax
Health insurance
Life insurance
Pension plan contributions
Unemployment insurance
Workers' compensation insurance