What Is Imputed Income? Definition & Examples
As a business owner with employees, you’re more than likely familiar with reporting regular wages on a W-2 form.
But, you may not be familiar with or aware that you have to report other amounts or payment types.
One of these payments is imputed income. But what actually is imputed income? We’ll give you a definition and some examples of what counts as imputed income.
Here’s What We’ll Cover:
What Is Imputed Income?
Imputed income is essentially benefits that employees receive that aren’t a part of their salary or wages. However, these benefits are still taxed as a part of their income.
So the employee may not have to pay for these particular benefits, but they are responsible for paying the tax on their value.
This income is added to an employee’s gross wage so that employment taxes can be withheld. But when it comes to an employee’s net pay, imputed income is not included. This is because the benefit was already given in a non-monetary form.
Even though it’s not included in the employee’s net pay, imputed income must be treated as income, and therefore it has to be both reported and taxed.
These benefits are given to an employee as fringe benefits.
What Are Fringe Benefits?
Fringe benefits are a way to compensate or give your employees beyond their regular wages.
They are a great way for an employer to attract and retain the employees your business needs and many businesses around the US use these benefits.
In fact, 71.6% of companies in the US offer fringe benefits.
Here are some examples of fringe benefits:
- Stock options
- Commuting assistance or parking reimbursements
- Health savings accounts (HSAs)
- Cell phones
- Gym memberships
- Free snacks and meals
Some fringe benefits and imputed income overlap. But the main difference between the two is that fringe benefits aren’t legally required. They are completely at the discretion of the business owner.
However, as we said they are a fantastic way to keep employee morale high.
What Are Some Examples of Imputed Income?
A lot of fringe benefits are taxed depending on the value received by the employee. Whereas other benefits are taxed regardless of the value.
As an employer, you should be aware of what can be considered imputed income. Here are some examples:
- Personal use of a company car
- Group-term life insurance in excess of $50,000
- Gym memberships and fitness incentives
- Employee discounts
- Educational assistance and tuition reduction
- Care assistance for dependents exceeding the tax-free amount
- Moving expense reimbursement
- Adoption assistance in excess of the tax-free amount
What Is Excluded From Imputed Income?
The general rule of thumb is that benefits below a certain value threshold or those that qualify for special treatment are excluded from imputed income. Here are some examples of what is excluded:
- Health insurance for dependents
- Adoption assistance below the annually adjusted amount
- Health savings accounts
- Dependent care assistance under $5,000
- Small or occasional employer gifts, like movie tickets, birthday cake, or a company t-shirt
- Group term life insurance under $50,000
- Education assistance under $5,250
How Do I Report Imputed Income for My Employees?
When handling imputed income as an employer, you have to report it on each employee’s W-2 form.
This means that you need to track the value of each of your employee’s imputed income throughout the year. This is just like you normally would do with their regular wages.
It isn’t normally necessary to withhold federal taxes from imputed earnings. But there are some cases where it is not exempt from federal withholding.
Your employees can actually choose to withhold federal income tax from their imputed pay. Or they can just pay the amount due when they file their individual tax returns.
Imputed income is an important part of managing your payroll.
It’s something you should keep on top of as a business owner. It’s also important to let your employees know that penalties may apply if their withholding is insufficient.
As with anything tax-related, it’s always a good idea to contact the IRS if you’re unsure or have questions.
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