Meanwhile, employee benefits are types of compensations offered to employees on top of the salary and wages they receive. Common employee benefits include overtime pay, medical insurance, life insurance, vacation leaves, and profit sharing, and retirement benefits.
It is important to note that while the terms benefits and perks are used interchangeably, they mean different things. Benefits are the non-wage compensation offered to employees, while perks are extra rewards or incentives on top of salary and benefits. Companies usually provide Perks to provide a better working experience that is not necessarily in the form of compensation. Examples of perks are company-subsidized meals, employee discounts, and gym membership subscriptions.
Why companies offer benefits aside from salary
Although people continue to look for work that offers higher pay, companies that provide competitive benefits are getting a lot of attention from a vast talent pool.
There are many reasons why companies continue to offer better benefits – one of the most common ones is to increase job satisfaction. According to a study conducted by the Society for Human Resource Management (SHRM), 61% of employees claimed benefits boosted their job satisfaction. Providing employees with benefits that enable them to enjoy personal activities, build security for health, and save money for future goals can boost workplace morale, engagement, and productivity.
Job seekers are always looking for job offers that offer better pay and employee benefits. According to a Glassdoor survey, around 60% of respondents said they strongly consider the perks and benefits being offered before accepting a job offer. Offering competitive pay and employee benefits makes companies more appealing to candidates.
As an employer, you probably offer your employees some types of fringe benefits. From health insurance to employee stock options to paid time off, there are a number of benefits out there. These benefits can impact your fringe benefit rate. So, what is a fringe benefit rate?
Fringe benefits overview
Before you can dive into learning about a fringe benefits tax rate, you need to know what fringe benefits are. Fringe benefits are benefits employees receive in addition to their wages. Independent contractors and business partners can also receive fringe benefits (not taxed). Examples of fringe benefits include:
- Company car
- Health insurance
- Life insurance coverage
- Education assistance
- Childcare reimbursement
- Employee stock options
Although fringe benefits are typically taxable, some are nontaxable. Taxable fringe benefits can include personal use of a company car, bonus pay, and paid time off. Some nontaxable fringe benefits include group-term life insurance up to $50,000 and employee discounts.
Keep in mind that some fringe benefits are only nontaxable in certain situations. And, some taxes could apply (e.g., some types of fringe benefits are only exempt from FICA tax).
What is a fringe benefit rate?
So … what is a fringe benefit rate? A fringe benefit rate is the percent of an employee’s wages relative to the fringe benefits they receive. Calculate a fringe benefit rate by dividing the cost of an employee’s fringe benefits by the wages they receive.
Employers can use a fringe benefit rate to examine the total cost of labor per employee. The fringe rate shows you how much an employee actually costs your business beyond their base wages.
Fringe benefit rates vary from business to business. The rate depends on how much you pay employees and how much an employee receives in benefits. Although rates vary, according to the Bureau of Labor Statistics, the average fringe benefit rate (aka benefit costs) is 30%.
How to calculate fringe benefit rate
The fringe benefit rate equation is pretty straightforward. To calculate an employee’s fringe benefit rate, add up the cost of an employee’s fringe benefits for the year (including payroll taxes paid) and divide it by the employee’s annual wages or salary. Then, multiply the total by 100 to get the fringe benefit rate percentage.
Use the following formula to calculate an employee’s fringe benefit rate.
Fringe Benefit Rate = (Total Fringe Benefits / Annual Wages) X 100
When adding together your employee’s total fringe benefits, remember to include all of their fringe benefits, such as:
- Employer portion of Medicare tax
- Employer portion of Social Security tax
- Unemployment insurance
- Workers’ compensation insurance
- Disability insurance
- Health insurance
- Life insurance
- Pension plan contributions
- Employee education assistance
- Adoption assistance
For a full list of fringe benefits, check out the IRS’s Fringe Benefit Guide and Publication 15-B.
Fringe benefit rate calculation example
Ready to see how to calculate fringe benefits in action? Check out examples of calculating fringe benefits rates for salaried and hourly employees below.
Salaried employee
Let’s say your salaried employee makes $80,000 annually. The employee’s total annual fringe benefits are $20,000, broken down as follows:
- Employer portion of SS tax: $4,960
- Employer portion of Medicare tax: $1,160
- Unemployment tax: $1,300
- Worker’s compensation: $1,000
- Employee’s health, life and disability insurances: $7,500
- Retirement benefits: $4,080
Divide the employee’s annual fringe benefits of $20,000 by their annual salary of $80,000.
$20,000 / $80,000 = 0.25
Next, multiply your total from above (0.25) by 100 to get your fringe benefit percentage.
0.25 X 100 = 25%
Your fringe benefit rate for this employee is 25%. This means your company is paying an additional 25% on top of the base salary for the employee.
If you want to find the employee’s total hourly rate (including their fringe benefits), you can divide the employee’s annual salary by the number of weeks per year and hours per week:
$80,000 / 52 weeks per year / 40 hours per week = $38.46
The employee’s hourly rate is $38.46. Multiply the hourly rate by your fringe benefit rate of 0.25. Then, add that total to the hourly rate to find the employee’s total wages plus fringe benefits per hour:
$38.46 X 0.25 = $9.61 (fringe benefit cost per hour)
$9.61 + $38.46 = $48.07
This employee’s “hourly rate” including the fringe benefits cost would be $48.07.
Hourly employee
Say you have a full-time hourly employee who gets paid $25 per hour. The employee has the following annual fringe benefits:
- Employer portion of SS tax: $3,224
- Employer portion of Medicare tax: $754
- Unemployment tax: $800
- Worker’s compensation: $722
- Employee’s health, life, and disability insurances: $3,740
- Retirement benefits: $2,200
The employee’s total fringe benefits are $11,440. Divide the total fringe benefits by the employee’s annual salary. To get the employee’s annual wages, multiply the hourly rate by the number of weeks in a year (52) and the number of hours worked per week (40).
$25 per hour X 52 weeks X 40 hours = $52,000 in annual wages
($11,440 / $52,000) X 100 = 22%
Your fringe benefit rate for this hourly employee is 22%. This means your company is paying an additional 22% of the employee’s wages for this employee.
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This is not intended as legal advice; for more information, please click here.
For many Canadians, the offer of employment benefits for new jobs is a huge deciding factor in whether or not they will accept the offer. Not only that but one of the top reasons cited by young workers for leaving a job was lack of benefits. To stay competitive in the job market in this day and age, businesses of all sizes need to offer some sort of employee perks and benefits to attract and retain workers.
As an employer, it’s essential to understand what employee benefits in Canada you must provide workers and what benefits can help attract new talent. Therefore, this guide was created to help small business owners learn important information surrounding these benefits, including the types of employee benefits that employers can offer, and the average cost of employee benefits in Canada for both employers and employees.
Employee benefits are the benefits or perks that employed persons receive from their employers above and beyond regular wages and compensation. An employee benefits package typically includes healthcare insurance, retirement plans, vacation and paid time off. Generally, these packages will cover 80%, and in some cases 100%, of healthcare costs. Both the employer and employee pay the monthly premium on benefits.
When an employee uses their benefits as a healthcare provider, they can deduct the amount from their package or pay for it out of pocket and claim back the expense through their employer’s benefits provider.
Various factors will dictate the level of benefits any employee might receive from their employers, such as full-time versus part-time, salaried employees versus those paid hourly, the industry you work within, and the company’s size. These benefits packages will look different for an individual that works within a large corporation versus a small business owner or self-employed individual.
In most cases, employers can deduct benefit premiums from their business’s income tax returns.
The types of employee benefits that employers can offer their workers can be split into two categories – mandatory employee benefits and supplementary employee benefits. Mandatory benefits are the benefits that employers must give their employees as dictated by the Government of Canada and employment standards legislation. Supplementary benefits, also known as fringe benefits, are those benefits that an employer can offer their staff but legally do not have to.
The mandatory benefits, also known as statutory benefits, are benefits that all employers must provide to their employees as governed by the provincial employment standards act. These government-mandated benefits include the following.
The Canada Pension Plan, or CPP, is a mandatory pension savings plan that all employed Canadians must be a part of. All employers, employees, and self-employed individuals must make contributions to this plan. However, certain groups of employees are exempt from these contributions, mainly Canadians who make less than $3,500 annually.
Employers will contribute to their employees’ CPP by deducting a specific percentage from their staff’s wages each paycheque. Learn more about what employers need to know about CPP.
This refers to sick leave and paid time off (PTO), including vacation days and maternity, paternity and parental leave. In most provinces, full-time employees are entitled to two weeks of paid vacation leave for one year of employment and up to three weeks vacation leave after five years of employment.
Under the Canadian Labour Code, employees are also entitled to three paid days of sick leave. At the same time, employers are legally required to provide parental leave, including paternity and maternity benefits covering PTO, and in some cases unpaid leave, to their employees who have just given birth or have adopted an infant or child.
Compassionate care leave, also known as critical illness leave, falls under this mandatory benefit type for almost all provinces in Canada. This is an unpaid allotment of time off that allows the employee to care for a sick relative without fear of losing their job in their absence.
All business owners that employ workers must pay for employment insurance benefits, also known as EI. Such insurance coverage provides benefits to individuals who have lost their jobs by no fault of their own and cannot secure a replacement job. That being said, this type of insurance only applies to businesses that hire employees. If you work for yourself as an independent contractor or freelance, you do not need to pay for this benefits package.
Both employers and employees pay for this EI. The employer will contribute to the employees’ premiums while also deducting a specific amount from every employee’s paycheque each pay period. Company contributions of EI are deductible as a business expense from the business’s income tax returns.
Supplementary or fringe benefits are benefit plans that many employers can choose to give to their employees. That being said, even though these fringe benefits are not legally required, they have become the standard in many businesses across Canada as a means to attract quality workers. These benefits include the following.
Healthcare coverage is paid for by both the employer and employee. Employees have the choice to opt into these employer-offered benefits or choose to forego the medical plan. Should they opt-in, then the employer will make contributions to these healthcare premiums while also taking a certain amount from their employees’ paycheques each pay period.
There are many different healthcare and medical services that are covered under this type of benefits plan. Such plans can include any or all of the following services depending on the chosen converge:
- Dental care
- Prescription drugs
- Hospital visits
- Vision care
- Paramedical services like physical therapy, massage therapy, naturopaths, acupuncture, and chiropractic care
- Out-of-country medical care or emergency travel care
- Employee Assistance Programs focusing on mental health support
Employers can deduct their employees’ health insurance premiums on their business income tax returns, as long as the rates are a reasonable business expense. It’s important not to confuse these health insurance premiums with the government-covered OHIP. The Government of Canada funds and provides OHIP to all Canadians through general tax revenue.
Employers can offer other retirement pension plans outside of the mandatory CPP contributions. These employer-sponsored pension plans include:
- Defined contribution pension plans
- Defined benefit pension plans
- Registered retirement savings plans (RRSP)
- Pooled registered pension plans (PRPP)
- Voluntary retirement savings plans (only for individuals employed in Quebec)
Employers will withhold a percentage of each employee’s paycheque every pay period and deposit this contribution in the chosen pension plan. Businesses can decide what percentage of these group RRSP contributions they will match each pay period. Generally, businesses will offer a 3% to 5% match in contributions.
Employers cannot deduct these pension plan contributions from the business’s income tax return.
Individuals contribute to a life insurance plan to ensure their loved ones are taken care of should they die. If an employee with this coverage passes away, their beneficiary (an individual appointed by the employee) is entitled to a payout. Should an employer offer this insurance benefit to their employees, then both parties will make contributions to this insurance plan. Insurers will typically offer the annual salary of the employee to the beneficiary in the event of their death.
There are specific stipulations businesses must follow if they want to deduct life insurance premiums as a business expense on their tax returns. Employers can deduct the entire cost of these premiums in their income return if the insurance coverage does not change based on age or gender and if they make contributions regularly. However, should the coverage change due to age and gender or the business does not pay premiums regularly, then the full cost of the premiums cannot be written off.
On top of this insurance coverage, employers might also offer accidental death and dismemberment coverage. Sometimes the two coverages can be bundled together and are generally equal in their total converge amount. In that case, should the employee die from an accident, the beneficiary will receive a payout from both life insurance and death and dismemberment insurance.
Disability insurance covers a percentage of the employee’s salary should they be unable to work due to sickness or injury. Employers can opt to provide short-term or long-term disability insurance to their workers.
Short-term disability coverage typically covers a 6 month period of illness or injury. Long-term coverage kicks in when short-term disability insurance ends, sick leave benefits end and/or EI benefits end. Generally, long-term disability insurance will provide an employee with up to 70% of their normal annual income.
These disability insurance premiums paid for by the employer are tax-deductible on the business returns.
There are other forms of disability insurance coverage not accessible through the employer but are offered through the Canadian government. This includes the Canada Pension Plan disability benefits and benefits for your children, disability benefits for veterans, and the registered disability savings plan (RDSP).
There are also other supplementary benefits that fall outside what we think of as the typical benefits packages listed above. These other types of benefits have become more common in recent years, as employers are finding new ways to entice top talent to their businesses.
These different benefits can include:
- Profit-sharing, stock options and employee equity within the business
- Health and wellness programs such as yoga and massage therapy in the office
- Vacation allotment above the government-mandated holiday days
- Tuition reimbursement programs
- Catered meals and free workplace canteens
- Perks and loyalty programs offering discounted access to membership services like gyms and online subscriptions
- Policies surrounding employee wellbeings, such as adjusted summer hours with Friday half-days or office mandated blackouts for scheduling meetings and calls (ie no meetings after 4 pm each workday)
- Paid days for volunteering, meaning two days out of the year the business will pay the employees’ wage to volunteer at an organization
- Covering board, lodging, and transportation for specific industries like farming and fishing
Therefore, should your business not decide to provide the standard benefits packages, offering wellness perks and these popular benefits can encourage employees to create a healthy work-life balance.
According to a Conference Board of Canada survey in 2015, the average cost made by employers for providing benefits to a full-time employee comes out to approximately $8,330. Many of these benefits packages include healthcare coverage of drug prescriptions, out-of-country medical care, vision care, physiotherapy, and dental services.
For example, for Ontario employers, the cost of employee benefits typically averages out to about 15% of payroll expenses when it comes to small businesses. This can rise to 30% of payroll costs for larger companies staffing more workers.
Generally, employees will match the rate their employers pay for the benefits each month, meaning the cost of these benefits premiums is shared between a company and their employees. Employees will have the amount deducted from their paycheque weekly, biweekly, or monthly, depending on the pay frequency of the company. These costs can differ depending on the province where the business is established and in which the employee works.
Employers can cap coverage of benefits at a certain limit for a set time; generally, every calendar year, to save money on premiums. Employers can also decide on the level of coverage, most likely offering between 80% and 100% of the cost.
In Alberta, work benefits must include CPP contributions as well as employment insurance paid by both employees and employers. For example, the average rate of benefits packages for Alberta public service employees will see the employer paying 5.25% of the employee’s yearly salary, while the employee pays 5.45% of their annual salary as part of their CPP contributions. At the same time, employees will contribute 1.58% of their annual income for employment insurance, and the employer contributes 1.16 times the employee contribution.
On top of these mandatory benefits, public service employees also receive health and dental benefits. This Alberta employee benefit plan is split into premiums for a family benefit plan and a single benefit plan. In terms of the single-core medical, prescription drug, and dental plan, employees contribute a premium rate of $22.60 biweekly, while the employer contributes $45.03. This premium rate jumps to $40.57 for employees paying for the family plan, while employers contribute $94.37 biweekly.
Overall, for the supplementary benefits plan, an employee on the single plan will end up paying $542.40 a year while the employer spends $1080.72. For the family plan, the employee pays $973.68 per year, while the employer contributes $2264.88. Therefore, employers will typically end up paying a few grand per employee each year for health benefits alone. This does not include the mandatory contributions or any other benefits like life insurance and long-term disability coverage.
Offering robust benefits packages that provide 80% coverage or more is one of the best ways you can stay competitive within your industry and attract the type of employees you want. That being said, paying for benefits each month as a small business can be a huge commitment and a strain on their finances.
Offering benefits to employees may be easier to do for large employers and corporations because they have the funds to provide these benefits to staff. However, it can also be advantageous for small businesses to do the same. It is important to weigh up the pros and cons of offering employee benefits to staff.
Big and small businesses will offer their staff members employee benefits as a means to promote employee retention. You are more likely to attract the top talent in your industry when you offer them benefits packages and other perks.
As a result, quality workers are more likely to stay when they receive benefits plans attached to their employment, driving loyalty towards the employer and reducing its turnover rate. At the same time, employees will use those benefits, which promote a healthy mind and body and a healthy work environment overall. Therefore, benefits packages create healthy and happy employees, significantly reducing the use of sick days and employee absenteeism.
Most of the premiums paid by the employer are also tax-deductible, making it easier to save on these business expenses. Businesses can also save on salaries, as employees may accept a lower wage or forego a pay bump in favour of a comprehensive benefits plan.
On the downside, paying for benefits can be expensive for smaller employers. For example, if your small business has a roster of just a few workers, including yourself, then the expense might outweigh the benefits. As such, these expenses are not static, meaning the cost to your business can change every year, making budgeting for these payments difficult.
Employment law and corresponding benefits packages can also be tricky. If handled poorly, legal issues and litigation can arise, meaning extra expenses incurred through the use of an employment lawyer. At the same time, your business might need to shell out additional money to pay for any legal fees incurred through checking contracts or due to litigation.
There may be fewer plan options available for small businesses. In addition, employees can opt out of employer-run benefits packages, so you will want to discuss the possibility of providing benefits to your employees before signing up for a plan.
No matter what types of benefits you decide to offer your employees, you will need the right tools to manage the business’s finances and payroll. Accounting software, like QuickBooks Online, can help you track monthly businesses expenses, including premium payments, manage payroll, and categorize payroll deductions to maximize tax savings.
Sign up for a free trial to prepare your business for paying for employee benefits today.
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