A fringe benefit rate is the proportion of benefits paid to the wages paid to an employee. The rate is calculated by adding together the annual cost of all benefits and payroll taxes paid, and dividing by the annual wages paid. For example, if the total benefits paid were $25,000 and the wages paid were $100,000, then the fringe benefit rate would be 25%.
Examples of the benefits that would be included in the numerator of this calculation are:
Employer portion of Medicare tax
Employer portion of social security tax
Pension plan contributions
Workers' compensation insurance
The 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.