Calculating Employee Benefits: Step-by-Step Guide

Company benefits are important: employees want to make the most of them, and companies want to optimize how much they pay for them. From life insurance to the company car, the benefits package can make up a big part of an employee's compensation plan. Knowing the dollar value cost of providing benefits is an important budgeting and forecasting skill to master.

Why should I be able to calculate employee benefits?

Having a better understanding of your workforce’s benefit costs lets you make more informed decisions on how much it takes to sustain and grow your human capital. Labor costs can make up a significant amount of your overall expenses, so it’s an important figure to factor in budgeting and planning forecasts, especially in tight labor market conditions.

Calculating employee benefits

Every company will have its own unique stack of benefits. Each benefit should probably fit in one of these categories:

• Mandatory benefits (legally required)

• Optional company benefits

• No-cost benefits

This article won't be able to tell you how to get the dollar figure estimates of each benefit—look to your human resources and accounting departments for help with finding invoices and tax filings. But we'll go through common examples you might forget about:

Mandatory benefits

Mandatory benefits include employer contributions to federal and state unemployment insurance programs, sick leave, retirement and pension schemes, accident insurance (workers’ compensation), and insolvency protection. These contributions are generally calculated as a percentage of payroll and sent directly to the relevant government agency. For example, in the US, employers contribute 6.2% of employee wages for federal Social Security and 1.45% for Medicare.

Employer-paid taxes vary from country to country. You can try Deel’s new salary cost calculator to estimate mandatory employer taxes in dozens of countries, but for a (very) general rule of thumb, expect to allocate around an additional 20% of an employee’s salary to mandatory taxes if you're planning to hire internationally.

Note: these employer taxes are not withholding taxes. Withholding taxes are taken entirely from the employee’s gross pay. As the employer, your responsibility is just to track and remit what you withhold.

Company benefits: fringe benefits

Benefits run the gamut in the corporate world, from the popular (employee health insurance, year-end bonus) to the unique (nap rooms, ice cream). In the US, benefits are defined as "fringe benefits" by the IRS. Fringe benefits include all forms of non-monetary compensation provided for the performance of services.

Common examples include:

• Health, dental, vision, disability insurance

• Lifestyle and wellness spending accounts

• Matching employee contributions to retirement plans

• Paid time off

• Donation matching

• Free or discounted products

• Company parties and events

• Tuition reimbursement

Further reading: 12 Great Perks and Benefits For Remote Employees and Virtual Teams

With so many forms of benefits possible, it’s important to be strategic with your benefits offering. In the US, most benefits are considered taxable to the employee, but some are not. Also, some benefit expenses may be tax-deductible for the employer. Check with an accountant or tax professional for details.

No-cost benefits

Not all benefits need to cost money. You can offer engaging perks with little upfront cost:

• Flexible working hours

• Work from home or work from anywhere policies

• Negotiate staff discounts from local vendors

• Mentorship opportunities

It may not be possible to assign a financial cost to these benefits, but it’s worth taking the time to review and revise company policies to ensure they’re being used as intended and to the fullest.

Learn more about non-mandatory benefits: What Are Non-Mandatory Benefits?

What can I do when I know my employee benefit cost?

You can use your benefits data to help calculate several other metrics. You’ll have a clearer holistic picture of your company’s total compensation package, which will help recruiters better articulate your company’s perks and competitive advantages. You can divide the total cost of your benefits by the number of workers to get a per-person metric or divide by the total annual salary expense to obtain a benefits load metric. You can use these metrics to benchmark them against national or industry averages. For example, in July 2021, private-sector employer benefit costs averaged 31.0% of total compensation expenses in the US according to the Bureau of Labor Statistics.

As well, knowing your employee benefits expense is just one step in determining your total cost of workforce (TCOW), an important figure that also takes into account overhead expenses such as employee enablement tools and equipment.

Is it possible to reduce employee benefit expenses?

It’s not possible to cut mandatory benefit contributions because they’re required by law. However, sometimes the government may allow employers to defer payroll taxes. For example, during the 2020 COVID-19 pandemic, the US government passed the CARES Act, which allowed employers to defer payments of Social Security taxes for several months. Check with your tax professional if your government is offering anything similar.

It is, of course, possible to reduce or eliminate optional employee benefits. These are often the first things to go when a company faces a need for substantial cost savings. Some companies offer stipends or flexible wellness accounts, which give workers spending flexibility without having to pay additional insurance premiums.

But cut too profoundly into optional benefits, and you’ll lose a competitive edge. A 2021 US survey by PwC found that 65% of workers are looking for a new position and ranked better benefits as the second-most important factor in their new job. Yet only 23% of executives surveyed thought workers were leaving because of benefits.

Instead of reducing benefits, explore other options to improve cash flow, such as reducing overhead costs and expanding your talent pool internationally.

About Deel

Deel lets you hire independent contractors and employees globally. Over 4,500 customers use Deel to compliantly and effortlessly provide localized benefits and payments in over 150 countries. Schedule a demo to find out more.