To retain their best employees, many companies offer perks and benefits packages. They have everything from cell phones to free gym memberships and high-cost life insurance policies.
However, even though these perks come at no cost to the employees, they are still liable for tax payments. The tax for utilizing them comes from the gross wage of the employees.
Imputed income is one of these taxable compensations that companies offer for better work experience.
What is Imputed Income?
Imputed income is the value of any perks or benefits that the company gives to an employee.
However, to correctly reflect an individual’s taxable income, the company must calculate the exact value of this compensation. So, while the employee is not required to pay for these perks, they are liable for paying the tax on their value.
Even though the employer includes this revenue in the employee’s gross salary to withhold employment taxes, imputed income isn’t reflected in an employee’s net compensation. This is because the company previously provided the benefit in a non-monetary manner.
Imputed money, however, is considered income. Even if the amount is not included in the employee’s net pay, it must be reported and taxed.
What are Examples of Imputed Income?
Many fringe benefits are taxed based on the amount received by the employee. On the other hand, some benefits are taxed regardless of their monetary worth.
Imputed income benefits are more costly; therefore, according to the IRS, they must be considered and included on the tax report of an employee. Employers should be aware of what accounts for an imputed income.
Here are some examples of what is considered to be an imputed income:
- Personal use of a company car
- Group-term life insurance above $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 above the tax-free amount
What Is Excluded from Imputed Income?
Benefits below a particular value level, or those that qualify for “special treatment,” are generally omitted from imputed income.
These advantages are inconsequential that the IRS considers recording or maintaining an account to be administratively impracticable.
Here are some examples of what doesn’t count as imputed income:
- Dependents’ health insurance
- Adoption assistance that is less than the annually adjusted amount
- Accounts for medical expenses
- Dependent care assistance of less than $5,000
- Employer presents that are small or infrequent, such as movie tickets, birthday cake, or a corporate t-shirt
- Group term life insurance under $50,000
- Education assistance under $5,250
Why do Companies include Imputed Income on Pay Stubs?
Companies add imputed income to each pay stub to help minimize the probability of employees being taxed for amounts more than their actual income levels allow.
Employers refer to this as “grossing up” the employees’ wages.
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How should an Employer Report Impute Income?
After determining the correct value of the imputed income, the company can administer that amount on a W-2 form.
While specific benefits, such as group-term life insurance and adoption aid, have a set price, others, such as personal use of a car, might need to be calculated according to the fair market value.
For example, if the company provides the employee with a vehicle to use, the value of the fringe benefit is the cost that the employee would spend if they leased a car from a third party.
The IRS has rigorous regulations regarding the value of an automobile lease, so it’s essential to consult Publication 15-B: Employer’s Tax Guide to Fringe Benefits to verify that the appraisal is done correctly.
When it comes to imputed income, employers can opt to report fringe benefit value at any time, but no less than once a year.
Options for period reporting include:
- Per pay period
The employer can modify the reporting frequency as much as they like. However, the company must report calendar-year benefits by December 31 of the year they were received.
Employees can choose to withhold federal income tax from their imputed pay. Alternatively, the employee can pay the amount owed when they submit their individual tax returns.