What is Imputed Income?

Imputed income means income attributed to taxable non-cash benefits an employee receives in the form of fringe benefits that are not a part of their wage or salary, such as gym membership, company car, moving expense, life insurance, or tuition.

If you’re a worker who receives “fringe benefits” from your employer – such as services or non-cash things that are taxable – that fringe benefit is called imputed income. For example, an employer awards an employee with a fully paid trip to Hawaii which includes airplane tickets, hotel, and foods. It’s the cash value equivalency of non-cash benefits received by W-2 employees. In addition, imputed income can arrive in services, experiences, or items which complement one’s normal pay. Employers and employees often misunderstand imputed income. In this brief article, we will break down the key elements of imputed income so that all parties understand why this type of income is important.

Imputed Income (aka Fringe Benefits): Airplane tickets to Hawaii, hotel, and foods voucher

What is imputed income on my paycheck?

An imputed income meaning is the benefits employers provide—and workers receive—that come in addition to their wages. For example, an executive at an insurance firm may receive a fitness club admission as an accompaniment to their monthly paycheck. Another example: an employee who drives a limousine receives free weekend access to a company vehicle as part of their payment package.

What is important to remember about imputed income is that workers still must pay taxes on the value of these benefits. This essential point is one that many overlook. For example, the worker who receives the fitness club admission still must pay taxes on the value of that membership. Again, returning to the example of the limo driver, the employee must most likely pay taxes on the estimated amount it would cost to lease the company vehicle.

Therefore, workers are not paying for the goods or services, but they are paying taxes on the value of the company’s goods and services.

What are other examples of normal imputed income sources? For example, some employees receive health insurance, and others eat for “free” at the company cafeteria. However, remember that these workers must pay taxes on all of these elements, even if they are experiential.

Why is Imputed Income Necessary?

When companies add value to monetary or non-monetary worker payments, they do so to withhold income tax fees and employment tax fees. Essentially, imputed income includes the overall value of the items, goods, benefits, or services given to an employee.

Therefore, employers must be aware that imputed income must be added to their workers’ gross income unless it can be deemed exempt.

Companies should not include the imputed income value in the workers’ net pay. This distinction occurs because the employee already received the item or benefit; it simply came to them in another form.

Employers, however, must include the value of the imputed income on their employees’ tax forms. Why? Because the imputed income amount is subject to income taxes, neglecting or not paying income taxes to the IRS is illegal.

Typically, imputed income is not susceptible to federal income tax withholding, but imputed income is open to Medicare taxes, Social Security taxes, and Federal Unemployment Taxes (FUTA).

How Can Workers Pay Taxes on Imputed Income?

Workers have two options for paying taxes on imputed income: they can withhold a preferred amount throughout the year to provide for the income, or they can wait and pay the taxes as part of their annual returns.

According attorneys for employers, employers must inform workers that they must withhold the proper amount of taxes on their imputed payments to avoid costly tax penalties or trouble with the IRS.

What is considered imputed income?

Some imputed income are taxed depending on their value. Below are some examples:

Use of a vehicle from the business
Fitness benefits
Assistance with the health care of dependents
Insurance policies that qualify
Paying for moving
Schooling, depending on the price
Adoption
Some small-value gifts
Health insurance for partners and some other parties

What Is Excluded from Imputed Income?

Depending upon their value, employers and employees can exclude some benefits from their imputed income numbers. Also, some benefits are eligible for unique treatment based on their specific nature, such as health plans for workers’ dependents.

Here are some examples of exempt benefits:

Dependents’ health plans
Accounts dedicated to health savings
Help with care of dependents under $5,000
Life insurance under $50,000 (full group term)
Help with education bills under $5,250
Help with adoption (below the annually corrected amount)
Small or occasional employer gifts, such as cinema tickets, sweets, and desserts
Business-branded t-shirts for promotional use

What Are the Benefits of Imputed Income?

Basically, imputed income adds value to employee compensation that does not involve cash.

Therefore, the employer does not have to pay income taxes and employment taxes on imputed income, saving them money.

Specifically, employers do not have to pay federal income taxes on imputed income. Yet, businesses must pay FICA tax, Social Security Taxes, and Medicare taxes. Therefore, it is vital that businesses pay the correct taxes on this income and do not overlook these categories.

Should Employers Avoid Imputed Income?

Employers cannot include imputed income in workers’ net pay. Why? Employers treat imputed pay as income. Therefore, they must tax this income, even though it is not cash. Businesses must tax imputed income unless workers are exempt, which only occurs in certain cases.

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