In budgeting for fringe benefits, fringe costs are shown as a percentage of payroll costs.

• A. 40 percent
• B. 20 percent
• C. 60 percent
• D. 10 percent

Answer: (A)

Fringe costs represent what it takes to provide benefits and payroll-related taxes on top of base wages, so budgeting them as a percentage of payroll helps you scale them as staffing changes. A typical fringe rate used in budgeting for many small businesses is around 40 percent of payroll. That means for every dollar paid in wages, you set aside about 40 cents to cover employer-paid taxes, health and retirement benefits, workers’ compensation, paid time off, and other fringe items. Using 40 percent gives a realistic estimate of total compensation costs for planning purposes; the lower options would generally understate the true cost for organizations offering standard benefits, while a 60 percent rate would overstate costs for most without extraordinary benefits. Of course, the exact rate can vary by industry and benefits package, but 40 percent is a common, practical budgeting benchmark.