For tax purposes, imputed income is the fair market value of non-cash compensation 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 includes 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 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 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.
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Finances and TaxesHow 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.