How to calculate employee benefits expenses

Introduction

Every organization today is looking to offer the best employee benefits to attract and retain top talent. As candidates increasingly prioritize comprehensive benefits packages, companies are now investing in employee benefits talents cannot refuse.While competitive salaries are essential for attracting talent, benefits such as group health insurance, paid time off, wellness programs, and statutory perks are equally important for retaining top performers and enhancing the employer brand.

However, these benefits come at a cost. Without a clear understanding of how to calculate, account for, and optimize employee benefits expenses,many organizations are  overspending on benefits they may not even need.

In this guide, we break down everything you need to know, from what qualifies as an employee benefit expense to how to record it correctly under accounting standards. You’ll also learn cost-saving strategies that help balance employee satisfaction with financial discipline. But, first let’s look at what employee benefits expenses are.

What are employee benefits expenses?

Employee benefit expenses are the cost employers bear for their employees other than the basic salary. This includes benefits like group health insurance, wellness programs for the employees, fitness plans, mental health wellness programs and much more. 

To decide on these benefits, companies can conduct surveys, strategise according to the needs of their employees and plan the perfect employee benefits package for their employees. After all, who wouldn’t like a yoga class, post a hectic workday? Some of the employees would love that and employers want to offer such perks.

But, this comes at a cost— employee benefits expenses. 

Employee benefits  expenses show up in your company’s profit and loss account (P&L),. They affect a company’s overall cost to the company (CTC).

Here’s what typically counts as employee benefits expenses:

• Health insurance and wellness benefits: This includes group health insurance, mental health coverage, fitness reimbursements, and even tele-consultations. These perks help your employees stay healthy, physically and mentally.
  
• Retirement contributions: Payments made toward Provident Fund (PF), gratuity, and pension schemes. These are long-term savings for employees and are legally required in most cases.
  
• Paid time off (PTO): Sick leaves, casual leaves, earned leaves, public holidays, basically, all the days when your employee is paid even though they aren’t working.
  
• Bonuses and incentives: Whether it’s a Diwali bonus, a sales incentive, or a performance-based reward, these count as benefits expenses too.
  
• Other perks: Meals at work, transport allowances, learning reimbursements (like an online course), or even childcare support, if your startup offers these, they go under employee benefits.

Two main types of benefits expenses:

1. Statutory (or mandatory): Benefits you’re legally required to provide under Indian labour laws. These include things like PF, ESI, gratuity, and maternity leave.
   
2. Voluntary (or discretionary): Extra perks that aren’t mandatory, but you offer them anyway to make your company more attractive to work for. Think flexible hours, wellness programs, or work-from-home allowances.

Why employee benefits expenses matter

Planning your company’s expenses should always be led with strategy. There is a lot of back and forth but adding the employee benefits expenses in your overall budget should be mandatory. This is because employee benefits packages are not only favorable to the employees but it is also financially beneficial for the employers.

Here are the top employee benefits and their financial impacts on the employers

Types of employee benefits expenses: Explained for startups

When startups grow, so do responsibilities, and employee benefits are a big part of the cost. But not all benefits are the same. Knowing the different types of employee benefits expenses helps HR and finance teams plan better, stay compliant, and avoid surprise costs. Here's a breakdown:

1. Direct benefits

These are expenses directly tied to an employee’s day-to-day work and performance. For example:

• Overtime pay for production workers during peak hours
• Shift allowances or on-call duty payments

These costs impact your core operations and are usually based on employee output or productivity. They’re easier to track and often vary depending on how busy your team is.

2. Indirect benefits

These are broader, non-performance-based perks that support employees' well-being. Some examples:

• Health insurance
• Admin or travel allowances
• Wellness reimbursements

They don’t depend on how much an employee produces but are crucial for retention and morale. These often appear as regular, predictable costs in your expense sheet.

3. Short-term benefits

As the name suggests, these are benefits employees enjoy in the short run, typically within the same financial year. Common ones include:

• Paid leaves (sick, casual, earned)
• Medical reimbursements
• Festive bonuses or performance incentives

They’re usually easy to forecast and budget but can become costly if not planned well, especially during appraisal cycles or festival seasons.

4. Long-term benefits

These are commitments you make to employees for the future. While they don't always show up immediately in your expenses, they add up over time. Examples:

• Gratuity (mandatory after 5 years of service)
• Pension contributions
• Post-retirement health insurance or superannuation

They affect your long-term financial planning and must be accounted for in your books under liabilities or provisions.

How to calculate employee benefits expenses 

Step 1: List all the employee benefits you offer

Start by writing down every single benefit you give your employees apart from their monthly salary. This could include:

• Health insurance (group health, accident cover, etc.)
• Provident fund (PF) and gratuity contributions
• Paid leaves and holiday pay
• Bonuses and performance incentives
• Meals, transport, learning reimbursements, or even wellness perks

Step 2: Find the cost of each benefit per employee

Next, estimate how much each of these benefits costs you per employee. Some are monthly costs (like insurance premiums), some are yearly (like bonuses), and others may be one-time reimbursements.

Example:
Let’s say for one employee:

• Health insurance costs ₹10,000 per year
• PF and gratuity together cost ₹8,000 per year
• Bonus and incentives total ₹5,000 per year
• Meals and wellness reimbursements add up to ₹2,000 per year

That’s ₹25,000 in total annual benefits per employee.

Step 3: Multiply by the number of employees

Now multiply that figure by your total number of employees to get your total employee benefits expense.

Example:
If you have 50 employees:
₹25,000 × 50 = ₹12,50,000 total benefit cost for the year.

Step 4: Calculate the employee benefits ratio

To understand what percentage of your payroll goes into benefits, you can use this formula:

Employee benefits ratio = (Total benefits expense divided by total salary expense) multiplied by 100

This tells you how much extra cost benefits add on top of the salary expense.

Example calculation

Let’s say:

• Total salary paid per employee = ₹1,00,000 per year
• Total benefits cost per employee = ₹25,000 per year

Employee benefits ratio = (25,000 divided by 1,00,000) multiplied by 100 = 25%

This means for every ₹1 lakh paid as salary, your company is spending ₹25,000 more on employee benefits.

Accounting: Employee benefit expenses in P&L

Whether you're running a growing startup or a mid-sized company, tracking what you spend on your employees is essential for financial clarity. These costs, known as employee benefit expenses, are a key line item in your Profit and Loss (P&L) statement. And how you classify them, direct or indirect, can seriously affect your cost structure, margins, and even compliance. Let’s break it down in simple terms.

What falls under employee benefit expenses?

Under accounting standards like IND AS 19 or IAS 19, companies are required to report all forms of employee-related costs in their financial statements. These include:

• Basic salaries and wages
• Bonuses and incentives
• Gratuity, Provident Fund (PF), and ESI contributions
• Group insurance premiums (health, life, accident)
• Staff welfare expenses like meals, transport, or wellness programs

Direct vs. indirect employee benefit expenses: At a glance

How to audit employee benefit expenses: A step-by-step breakdown

To keep your employee benefits efficient, compliant, and budget-friendly, it’s important to audit your employee benefit expenses regularly. Whether you're a startup or a growing company, HR and Finance teams should work together to review what’s being spent, why, and whether it’s reaching the right people. Here’s a specific and in-depth process to follow:

1. Review benefit plan documents

Start with the basics. Go through the documentation for each employee benefit plan, like PF (Provident Fund), ESI (Employee State Insurance), gratuity policies, bonuses, insurance, and wellness benefits. Make sure they clearly mention:

• Who’s eligible
• What’s covered
• When payouts or claims happen
• Rules around approvals or caps

2. Match records with payroll and vendor invoices

Cross-check your payroll reports with actual vendor bills, whether it’s for health insurance premiums, wellness platform subscriptions, or meal benefits. This ensures there’s no double billing or payment for inactive employees.

3. Verify statutory contributions

For legally required benefits like PF, ESI, or gratuity, verify if:

• Contributions are made on time
• Rates are correctly applied
• Government filings (like ECR for PF) are up to date

4. Confirm benefit utilization

Check if employees are actually using the benefits provided. For example:

• Are they using teleconsultations or health check-ups included in insurance?
• Are bonus payments following company policy and performance criteria?

5. Ensure compliance with tax & labor laws

Employee benefits often come with tax implications. For example:

• Are food coupons or travel reimbursements exceeding exempt limits?
• Are benefits taxed correctly under the Income Tax Act?

Why employee benefits expenses matter for startups

• Attract Top Talent: Benefits are a key differentiator beyond salary.
• Improve Retention: Happy employees stay longer, lowering hiring costs.
• Boost Productivity: Wellness perks and PTO help prevent burnout.
• Ensure Compliance: Statutory benefits (PF, gratuity) are legally required.
• Tax Benefits: Some expenses are deductible or exempt for employers.

Factors affecting employee benefit expenses

• Company size and growth stage
• Type of benefits offered (basic vs. premium)
• Employee age and family status
• Industry norms and peer benchmarks
• Vendor costs (insurance, HR software)
• Benefit utilization rates

Strategies to manage employee benefit expenses

1. Offer Tiered Plans: Let employees choose flexible benefits within a budget.
2. Outsource Admin: Use HR tech or third-party tools to reduce admin load.
3. Promote Preventive Health: Lower insurance claims by encouraging wellness.
4. Benchmark Regularly: Stay competitive without overpaying.
5. Track Utilization: Eliminate unused or low-value perks.
6. Negotiate Group Rates: Use pooled insurance for cost-effective coverage.

How much do employee benefits cost startups?

On average, employee benefits can add 20%–35% to total compensation costs.

Breakdown example (per employee annually):

• Salary: ₹10,00,000
• Benefits: ₹2,50,000
• Total CTC: ₹12,50,000

Final thoughts

For startup HR teams, employee benefits expenses are an investment in people. When planned well, they fuel performance, loyalty, and growth.

Understand what you're offering, track every rupee, and evolve your benefits strategy as your startup scales. It’s about sustainable growth and a thriving team.

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