How to calculate fringe benefits: A guide for contractors

Fringe benefits expand compensation packages for certain public works jobs and union employees. Accurately calculating these benefits is tricky, as contractors have a long list of strict rules and reporting requirements to comply with. This process is one of the biggest headaches office teams face, but a consistent process and the right tools help you manage the numbers cleanly and confidently.

In this guide, you’ll learn how to calculate fringe benefits, what’s typically included, and how these perks apply to hours worked.

What are fringe benefits in the construction industry?

In general, fringe benefits refer to any perk employers give workers beyond their base hourly wage. Companies often use these extras to recruit, retain, and reward employees. 

But in construction, unions and governments may require employers to offer specific benefits or their equivalent in cash. For instance, the Davis-Bacon Act says contractors working on federally funded public works projects over $2,000 must pay prevailing wages, which include a mandated hourly rate and a specific fringe benefit amount. Unions can also list fringe benefits in their collective bargaining agreements (CBAs). 

Not everything counts toward these requirements. Examples of fringe benefits include:

• Health insurance
• Life insurance
• Retirement plan contributions
• Compensation for injuries or illness

There isn’t just one way to meet these requirements. Here are the two main ways employers satisfy fringe benefit requirements.

Direct benefit administration

In this situation, employers offer workers a bona fide benefit plan that meets fringe benefit requirements. Contributions to fringe benefits like 401k and health insurance count toward the fringe requirement.

Providing benefits directly also lets employers count those costs toward their fringe obligation through prevailing wage fringe credits. Since the fringe portion covered by benefits isn’t paid as taxable cash wages, this reduces taxable wages, payroll taxes, and workers’ comp premiums, which are calculated based on wages.

If you want to optimize benefit administration but don’t want to complicate your payroll, try Miter. Our platform handles prevailing wage fringe credits automatically, saving most of our customers 3–5% on public works jobs. Total, the average public works contractor pockets $30,000 or more annually. Some users even save upward of $1 million every year.

Cash payment

You can choose to pay the fringe rate in cash rather than through a structured benefit plan. Employers do this by incorporating the fringe benefit rate into each employee’s hourly wage. For example, if the base hourly wage is $40 per hour and the fringe rate is $10 per hour, teams can satisfy benefit requirements by paying $50 per hour.

Some workers prefer cash in lieu of benefits because it gives them more flexibility over how they use their compensation. Keep in mind that these cash payments may mean more payroll taxes, which can increase project costs. You’ll also miss out on fringe credits, potentially leaving thousands of dollars on the table.

Direct benefits and cash payments aren’t mutually exclusive. If it fits your strategy, you can provide a portion of the benefits directly and make up the difference in cash.

A mix of both

Direct benefits and cash payments aren’t mutually exclusive. If your current benefit plan partially meets the fringe requirement but falls short of the threshold, you can pay the difference in cash.

For example, if the required fringe rate is $10/hr but your benefits only cover $7/hr, you’d pay the remaining $3/hr as cash wages. This approach gives you flexibility to maximize fringe credits where you can while staying compliant without overhauling your entire benefits package.

How to calculate fringe benefits: 6 steps

Here’s how to calculate fringe benefits for prevailing wages and union employees.

1. Find the required hourly fringe rate

Check government and union resources to find the right fringe benefit requirements for each project. CBAs and wage determination sheets usually list them. State and local governments should also have more information on their official websites. 

These resources list the minimum base hourly wage and fringe rate for each employee classification and job type. You’ll need the fringe rate to determine how much you owe each worker in benefits per hour worked.

2. Work out your current benefits spending for each employee

Itemize the cost of every benefit you pay for and add it all together. For example:

• Health insurance costs $500 a month
• Life insurance costs $50 a month
• Retirement plan contributions cost $200 a month

In this case, your benefit spending comes out to $750 a month, or $9,000 a year, for this employee.

3. Convert benefit costs into an hourly value

Now, you need to convert total benefits spending into an hourly value you can compare against required benefit rates. Here are the two ways do it:

• Using a standard 40-hour work week: Divide your annual benefit cost by 2,080 hours (40 hours a week multiplied by 52 weeks a year). For example, at $9,000 a year, you’re paying an hourly fringe rate of about $4.33. This method can work if most employees have a standard full-time work week.
• Using actual hours worked: Divide your annual benefit cost by the number of hours worked. Say an employee works 180 hours a month (2,160 hours a year), and you’re paying $9,000 annually. This makes your hourly fringe rate about $4.17. This method is more accurate if employees have distinct work schedules.

Whichever route you choose, it will be a firm policy decision, so you’ll need to apply it consistently across all employees and pay periods.

4. Compare to the required rate

Now that you have your hourly fringe rate, verify whether it’s enough to cover the requirements listed in the wage determination. For example, if the required fringe rate is $5 but you’re only paying $4.33, you have a shortfall of $0.67 per hour. You’ll need to make this up in the next step. 

Depending on the regulations, you may need to break this down by benefit. For instance, some unions set specific rates for things like health care and training. 

5. Close the gap with additional cash payments

If you’re paying the required hourly fringe rate or more, you’re all set. If not, you can make up the difference by providing cash in lieu of fringe.

Running with our example above, you’d need to pay an additional $0.67 per hour to meet the fringe requirement. If the employee works a standard 40-hour week, multiply $0.67 by 40 to arrive at $26.80 a week. This is the additional amount you have to pay in cash on top of their base wages benefits to stay compliant.

6. Check your work before reporting

Certified payroll reporting is strict, and non-compliance can lead to financial penalties. Double-check that your calculations accurately reflect employee classification, hours worked, and required hourly fringe rates before submitting them.

Common fringe benefit calculation mistakes

Calculating fringe benefits can be complex, which makes it easy to slip up. Here’s a list of the most common mistakes to watch out for:

• Counting optional benefits like bonuses as fringe benefits
• Reporting the wrong numbers or using the wrong form
• Applying universal fringe rates across different jobs and employee classifications
• Paying the fringes monthly or yearly instead of weekly
• Applying overtime rates to the fringe rate

Automate complex fringe benefit calculations with Miter

Fringe benefits are a common requirement, but that doesn’t mean managing them is a walk in the park. If you’re running construction payroll manually, it’s only a matter of time until a mistake is made, and errors mean painful rework and compliance penalties.

Miter automates fringe benefit calculation and compliance for prevailing wage and union jobs. By unifying time tracking, employee classification, and project data under a single system, our platform speeds payroll processing and kicks errors to the curb. You can rest easy knowing your certified payroll reports are immaculate, week after week.

Frequently asked questions

What are fringes in payroll?

Fringes, also called fringe benefits, are non-wage compensation employers provide their workers on top of wages. Common examples are health insurance, life insurance, and retirement plan contributions.

Contractors working on public works jobs or employing union workers are often required to provide fringe benefits at a specific hourly rate set by the applicable wage determination or collective bargaining agreement. Employers can meet this requirement by providing bona fide benefits directly, paying the equivalent in cash, or a combination of both.

Are fringe benefits deducted from paychecks?

No, fringe benefits are paid by the employer, not deducted from the employee’s wages. They’re provided on top of the employee’s base hourly rate.

Do fringe benefits apply to overtime hours?

Yes, you have to pay the fringe rate for every hour worked, including overtime. However, the fringe rate is flat. While you might have to pay time and a half for wages, the fringe rate remains the same no matter how many overtime hours an employee works.