For tax purposes, imputed income is the fair market value of non-cash compensation that business owners give to employees, which can be in the form of perks known as fringe benefits.
This income is added to an employee’s gross wages so employment taxes (i.e., FICA taxes, which include Social Security and Medicare taxes) can be withheld. Imputed income is 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 employee benefit was provided by employers, imputed income must be treated as taxable income, and therefore be reported unless specifically exempt.
In this post, you’ll learn about the meaning of imputed income along with your obligations as an employer.
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’s car
Group-term life insurance coverage in excess of $50,000
Gift cards or certificates
Imputed income can also be more advanced, including dependent care assistance exceeding the tax-free amount, adoption assistance in excess of the tax-free amount, as well as providing benefits for domestic partners and their children.
In addition, while health insurance isn’t considered a fringe benefit, pre-tax health savings account (HSA) contributions up to the limits through a cafeteria plan would get calculated as imputed income. Likewise, when long-term disability (LTD) insurance premiums are taken pre-tax from paychecks, employers report that as imputed income on an employee’s W-2 form.
Minimal (aka de minimis) incentives, like an occasional meal paid for by a company, may be considered such a small amount that it wouldn’t be accounted for, but professional tax advice can provide guidance on how this can be interpreted.
How do I report it for my employees?
Imputed income is subject to employment taxes, so you must report it on each employee’s Form W-2.
Because of that, you must track the value of each employee’s imputed income during the year just like you do with regular taxable wages. Ordinarily, imputed income tax isn’t withheld, 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.
Pro tip: Make sure your CPA or payroll service provider can accurately handle and calculate fringe benefits along with imputed pay.
Imputed income FAQ
Is health insurance imputed income?
No, health insurance isn’t considered imputed income. That said, certain types of health benefits, like a health savings arrangement (HSA) with a cafeteria plan, would get calculated as imputed income.
How do you calculate imputed income?
You can calculate imputed income in three simple steps: 1) assign a fair market value—what someone would reasonably pay in the open market—to the fringe benefit, then 2) subtract the amount of money your employee pays for the benefit, and 3) add the remaining amount to the employee’s taxable wages. Say, for example, that you give your employees a discounted subscription to a meditation app. The monthly cost is $12, which is the fair market value. Your employees pay $4, which means the imputed income would be $8.
What is the difference between imputed income and fringe benefits?
A fringe benefit is any non-cash benefit or perk you provide to your employees. The imputed income is the monetary taxable value of that perk, which is added to an employee’s gross income.
Does imputed income affect my W-2?
Yes, imputed income increases your total taxable wages. You’ll see the value of your taxable fringe benefits listed on your W-2 form, usually in Box 14.
