In addition to wages, fringe benefits are earned by employees as compensation for services performed. In a lost earnings claim, fringe benefits could be a significant component of possible damages. However, the economics of lost fringe benefits can be confusing, and correctly understanding them is important. Statutory benefits, tax reporting forms, employer benefits statements, and government studies are often relied upon to determine fringe benefits. An understanding of how these items, and how they interact, is necessary for an accurate calculation of an employee’s lost fringe benefits.
Statutory Fringe Benefits
Statutory fringe benefits are benefits employers are legally required to provide. The largest statutory fringe benefit an employee receives is an employer’s contribution so Social Security. In 2020 the employer contribution rate is 6.2% on the first $137,700 of wages. Employer contributions to Social Security are directly tied to the employee’s Social Security account. Social Security is a pension benefit held directly in the employee’s name with the Social Security Administration.
Unlike Social Security, the employer’s contribution to Medicare is not a benefit held in the employee’s name. Instead, the employer’s contribution to Medicare is a tax that funds Medicare. Since the tax is not a “named” benefit, generally, it is not included as a fringe benefit for lost earnings claims even though the employee may benefit from Medicare during his or her lifetime.
Tax Reporting Forms
IRS Form W-2 reports an employee’s earnings from an employer during the year. Box 1 of the W-2 reports wages subject to income tax. Boxes 3 and 5 report wages subject to Social Security and Medicare. Retirement contributions and items not subject to income tax are not included in Box 1. As previously mentioned, Social Security is limited. Medicare is not limited. Almost all items of an employee’s wages are subject to Medicare tax. For this reason, Box 5 on Form W-2 is the best indicator of an employee’s wages.
Employer Benefit Statement
Employers may provide their employees with written information on fringe benefits available to them. These documents are normally updated annually and provide exact information. The employer’s contribution to health insurance premiums, the percent or amount of retirement plan contributions, employer contributions to a health savings account, life insurance, and paid time off are examples of the types of fringe benefits explained in these documents. If available, these documents are the best sources for determining employer costs of fringe benefits
If employer benefit statements are not available, an economist may rely on studies. The U.S. Department of Labor, Bureau of Labor Statistics (BLS) conducts a quarterly survey of employers in the United States on the cost of employee compensation. This survey provides information for civilian works, private industry workers, and state and local government workers. The study provides average costs of total compensation, paid leave, supplemental pay, insurance, retirement, and legally required benefits.
A common misconception is that these percentages can be applied directly to employees’ earnings on their W-2s. This is incorrect because paid leave and supplemental pay are included in the W-2. If the percentages are not adjusted to account for paid leave and supplemental pay, the calculation could result in these items being counted twice (once as wages on the W-2 and once as a fringe benefit).
The fringe benefit rate is the percent of W-2 wages an employee receives as compensation through fringe benefits. This rate normally ranges from 6.2% to 40% of an employee’s earnings on his or her W-2. The types of benefits an employee receives and his or her overall income are key factors that determine the fringe benefit rate. A strong understanding of how fringe benefits work and are reported is critical to an accurate calculation of the fringe benefit rate.
If you have questions regarding fringe benefits, please contact our team of specialists.
This article was written by Steven Johnson, a CPA and Shareholder in the Tax and Valuation and Litigation Consulting department at Anderson ZurMuehlen in Helena, Montana.