Imputed income is the value of non-monetary compensation given to employees in the form of fringe benefits. This income is added to an employee’s gross wages so employment taxes can be withheld. It’s not included in an employee’s net pay since the benefit was already given in a non-monetary form.
But because the value of a service or benefit was provided by employers to employees, it must be treated as income, and therefore be reported and taxed, unless specifically exempt.
What are some examples of imputed income?
Some examples include:
- Non-deductible moving expense reimbursements
- Gym memberships and fitness incentives
- Personal use of a company car
- Educational assistance and tuition reduction
- Employee discounts
- Personal use of employer car
- Adoption assistance in excess of the tax-free amount
- Group-term life insurance in excess of $50,000
- Care assistance for dependents in excess of the tax-free amount
Imputed income can also be more advanced, including care assistance for dependents exceeding the tax-free amount, or adoption assistance exceeding the excluded amount.
How do I report it for my employees?
Imputed income is subject to employment taxes so you must report it on each employee’s W-2 form. Because of that, you must track the value of each employee’s imputed income during the year just like you do with regular wages. Ordinarily, it isn’t necessary to withhold federal taxes from imputed earnings, but in some cases, it is not exempt from federal withholding. Employees can choose to withhold federal income tax from imputed pay, or they can pay the amount due when filing their tax return. Let your employees know that penalties may apply if their withholding is insufficient. It’s always a good idea to contact the IRS if you’re unsure or have questions.
Make sure your CPA or payroll provider can accurately handle and calculate fringe benefits along with imputed pay.