There are three good reasons why it’s important for you to understand how much your benefits at work are worth:
- It could help you to decide whether or not you really want to be self-employed – the benefits lost will be part of the price you will pay for having your own business.
- Knowing what benefits your employer pays will help you better assess whether or not you should change jobs to another employer. If your employer is particularly generous with benefits, that may outweigh a higher salary at another job.
- Knowing how much your employer pays for your benefits might help you to appreciate your job at least a little bit more.
For these reasons, we’re going to attempt to estimate the value of those benefits.
There are two ways to determine the value of employee benefits. The first is what the employer actually pays for the benefits, and the second is the value of those benefits to you personally. For our purposes, were going to ignore what the benefits cost the employer, and focus on the direct monetary benefit to you personally. This will be especially relevant if we are considering self-employment or making a job change.
We’re going to assume you earn $100,000 per year. I know that this is at least twice the average income in the US, but it’s a very round number making it easier for calculation purposes.
There are various payroll taxes that your employer either matches your contributions, or pays the entire tax on your behalf. We are only going to concern ourselves with FICA taxes – Federal Insurance Contributions Act – which covers Social Security and Medicare payroll taxes. Your employer also has to pay federal unemployment insurance and state unemployment insurance. However since you would not have to pay these taxes if you were self-employed, we’re going to ignore them for now.
The combined FICA tax is 15.3% of your income. Half – 7.65% – is paid directly by you the employee, while the other half is paid by your employer. (If you were self-employed, you’d being paying both halves.)
Your employer’s FICA contribution based on your $100,000 salary: $7,650. No matter where you work, this tax has to be paid so it’s really only important if you are considering striking out on your own.
These benefits vary greatly from one employer to another. They depend not only on the cost and the amount of coverage, but also by the number of policies offered. There is a wide range of potential insurance benefits that an employer may offer, including health insurance, dental and vision, life insurance, accidental death and dismemberment and long-term disability insurance.
Since not all employers offer all of these policies, let’s stick with the two most basic – health and life insurance.
Health insurance is a big one, and while few employers pay the entire premium for you, most will pay a certain percentage. For our purposes let’s assume that you have a policy covering your entire family of four, at a cost of $15,000 per year. If your employer pays 60% of the premium, then you’re receiving an annual benefit of $9,000 (60% of $15,000).
Life insurance provided by an employer is typically term insurance, so it is fairly cheap. Assuming that they are covering a death benefit equal to your annual salary of $100,000, it’s probably costing them no more than $300 per year.
Your employer paid insurance benefits: $9,300.
Matching retirement contributions
There are potentially two employer contributions retirement-wise, a company match on your 401(k) contributions, and employer contributions to a defined benefit plan. Since defined benefit plans are now nearly extinct, we will focus on the employer’s matching contribution on your 401(k).
If your employer does a 50% match on the first 6% that you contribute to your 401(k), then they will be contributing 3% of your salary to your plan.
Your employer paid 401(k) match benefit: $3,000 ($100,000 X 3%).
Paid time off
This usually comes in several forms. You typically have paid time off for vacations, sick days and holidays. Assuming that you get 10 days for vacation, five paid sick days, and seven paid holidays, that’s a total of 22 paid days off per year.
At $100,000 per year, your daily rate of pay is approximately $385 ($100,000 divided by 260 workdays).
Your employer paid benefit for paid time off: $8,470 ($385 per day X 22 paid days off).
Adding it all up
So let’s put it all together, and figure out how much employee benefits add to your income:
- Matching FICA contribution: $7,650
- Paid insurance benefits: $9,300
- Paid 401(k) match: $3,000
- Paid time off: $8,470
Total employer paid benefits based on a $100,000 income: $28,420.
That represents more than 28% of your annual income. If your annual income is $100,000 then, in reality your total compensation is $128,420!
That’s just a rough estimate based on common benefits paid by a large number of employers. Your benefits could be higher or lower, depending upon which benefits your employer provides.
For example, though your employer is required to pay the FICA tax match, they may not offer health insurance coverage, or if they do, they may not provide a company contribution. On the other hand, some employers pay all the above benefits, but also offer vision and dental coverage, a defined-benefit pension plan, or even more generous paid time off. As you can see, employee benefits are a big part of your total pay.
Have you ever calculated the value of your employee benefits?