- Imputed income is the value of any cash or non-cash fringe benefits business owners pay their employees.
- Common imputed income examples include personal use of company cars, gym memberships, and nondeductible moving expenses, while health insurance plans and certain low-value benefits are excluded from imputed income.
- Employers must identify the company’s taxable fringe benefits and their cash value, then calculate and pay FICA taxes on them, but payroll software can automate the process from start to finish.
- This article is for business owners looking to understand and calculate employees’ imputed income and the taxes it entails.
Let’s say you paid an employee $60,000 last year and calculated their federal taxes for the year as $13,538.50. That would be correct based on FICA and federal income tax rates, but it would be incorrect if you provide certain benefits. In that instance, you’ll also need to add imputed income to the employee’s $60,000 gross wages to reflect these benefits’ cash value. Below, learn more about calculating imputed income and the corresponding taxes you must pay.
What is imputed income?
Imputed income is the cash equivalent value of an employee’s non-cash benefits. This value becomes part of the employee’s gross income. As such, imputed income is taxable, and you must report it on your employees’ W-2 forms. Your business will typically pay FICA tax (Social Security and Medicare tax) on imputed income, as will your employees. The IRS usually doesn’t levy federal income taxes on imputed income.
Another way to look at imputed income is to consider it the cash value of the non-cash benefits or services a business owner gives their employees. When you provide these benefits to staff, you pay for them so the employee doesn’t have to. The IRS classifies the money you spend on these benefits as money you pay your employees.
Imputed income primarily encompasses the cash value of fringe benefits. This type of benefit describes any perk or compensation you provide your employees in addition to their actual wages. That definition might make you think the cash equivalent of all benefits qualifies as imputed income, but that’s not quite the case.
Not all imputed income is taxable. Understanding the difference between taxable and nontaxable fringe benefits is critical to ensure you’re properly paying your taxes.
What are examples of imputed income?
The following benefits qualify as imputed income:
- Care assistance for an employee’s dependents over a certain tax-free maximum
- Adoption assistance over a certain tax-free maximum
- Employee education assistance over a certain tax-free maximum
- Any vehicles you provide to your employees (whether you own or lease them) for regular non-business use
- Gym memberships or other fitness-related perks
- Moving expenses that aren’t tax-deductible
- Group term life insurance with coverage greater than $50,000
- Non-bonus cash and gift cards (bonus tax is separate from imputed income tax)
- The addition of an employee’s non-dependents to their employer-provided health insurance plan
- An employee’s income from exercising nonstatutory stock options
- An employee’s taxable income from the vesting or issuance of restricted stock
- Any non-business use of an employer-provided cell phone
- Transportation benefits above employer and employee pretax deferrals under a Section 132 Plan
- Meals and lodging, except during tax-deductible business travel
- Reimbursement for any classes or development opportunities unrelated to you and your employee’s work
- Travel expenses not related to business (for example, paying for an employee’s vacation flights after they attend a conference for you)
What is excluded from imputed income?
The following benefits do not qualify as imputed income:
- Reimbursements for any of the above that the employee has already paid for out of pocket
- Any achievement awards of up to $1,600 for qualified plan awards
- Adoption assistance, up to a certain maximum amount
- Commuter benefits, up to a certain maximum amount
- Dependent care assistance of up to $5,000 per year, though no more than the earned income of the employee or their spouse
- The first $5,250 of an employee’s annual education assistance
- Group term life insurance coverage of at most $50,000
- Retirement planning services
- Qualified employee discounts
- Health savings accounts (HSAs)
- Health, dental and vision insurance
- Employer-paid disability insurance premiums
- On-premises fitness benefits, such as on-site gyms
- Meals and lodging during business travel
- Small cash gifts under $100
- Company parties
- Occasional event tickets
- Entertainment and team-building activities
- Floral arrangements and fruit baskets
- Branded company items, such as pens and apparel
Unique job benefits, like student loan paydowns and pet-friendly environments, can keep employees happy. But before offering such perks, consider whether it counts as imputed income.
How do you report imputed income for employees?
Employers should use IRS Form W-2 to report imputed income. Before filling out this form, though, you’ll need to identify all of your business’s fringe benefits. You’ll then eventually have to calculate and pay taxes on these benefits. Below is a step-by-step guide to reporting your employees’ imputed income to the IRS.
1. Identify your fringe benefits.
Let’s say you give an employee $5,000 in education assistance per year alongside a $600 annual gym membership. These are the only perks you provide besides basic health insurance. In this example, both these perks are fringe benefits, whereas the health insurance is not.
2. Identify which of your fringe benefits are taxable.
According to the above criteria, the employee education assistance you provide is non-taxable. That’s because it’s under the $5,250 minimum that triggers taxation. However, the $600 gym membership for which you’re paying is taxable. That means the gym membership payment is considered part of the employee’s personal income.
Note that certain taxable fringe benefits, such as personal use of a company car, might not have immediately obvious cash values. In those situations, you’ll have to determine the benefit’s fair market value. For example, a company car’s fair market value would be however much money the employee would pay to obtain the vehicle on their own. You should estimate this value in accordance with the IRS Publication 15-B rules on car valuation.
3. Add the employee’s imputed income to IRS Form W-2.
You’ll need to report the employee’s imputed income alongside their gross wages on Form W-2. You’ll do so in boxes 12a through 12d. Detailed instructions on how to correctly add imputed income to these boxes are available on the back of copies C and 2.
Imputed income also factors into the wages you’ll report in boxes 1, 3 and 5. Box 1 includes “other compensation,” a definition under which imputed income falls. And since imputed income is subject to Social Security and Medicare taxes, you must add it to gross employee wages in boxes 3 and 5.
4. Calculate imputed income taxes.
In most scenarios, imputed income is subject to FICA taxes only. As of 2022, the FICA tax rate is 6.2% for Social Security and 1.45% for Medicare. That’s a total of 7.65%, which corresponds to $45.94 for a $600 yearly gym membership.
These imputed income calculations can be a common source of human error. Payroll software can automate tax formulas while massively cutting down on mistakes. That’s true even if your business’s payroll is highly complex. For companies with complicated payrolls, an advanced platform like ADP can help you dot your i’s and cross your t’s. Read our full ADP review to learn more, and find other great options among our reviews of the best payroll software.
Still struggling to wrap your head around imputed income? Gusto includes added HR services alongside its payroll platform. Check out our full Gusto review to learn how the company’s HR expertise can help you understand imputed income.
5. Pay your imputed income taxes.
You can pay your imputed taxes every income period, quarterly, semiannually or annually. Some payroll services can process and submit this payment on your behalf instead of you doing so manually. In other cases, you’ll have to submit the payment yourself, though electronic payment is often possible. [If you don’t use payroll software yet, follow our guide to choosing a payroll service.]
No matter how you pay your imputed income taxes, referencing this guide every time you do should make the whole process easier.