Imputed Income

Imputed Income Meaning, Examples, Calculation & Tax Guide

Imputed income definition: It is the non-cash compensation or extra perks that an employee receives, for instance, a gym membership, a gift card, etc. These are employer-provided fringe benefits and not considered a part of an employee’s basic salary. Employees are therefore responsible for paying applicable taxes on the value of these benefits.

As a matter of fact, employers include this amount in the employee’s gross income and report it on Form W-2 (Wage and Tax Statement). In some cases, employers must withhold federal income tax and FICA taxes on supplemental income, although certain exclusions may apply as part of standard fringe benefit taxation guidelines.

Accurate Payroll reporting of imputed income requires employers to properly track taxable fringe benefits and include them correctly in payroll records and year-end filing.

Imputed Income Examples

Athletic facilities and gym membership
Employee discounts
Educational assistance, if over $5,250
Dependent care assistance above $5,000 per year
Lodging on business premises
Transportation or commuting benefits
Employer-provided cell phones
Tuition reduction
No-additional-cost services
Extended health insurance (involving non-dependents)
Cash gifts for employees (such as gift cards and cash)
Adoption assistance exceeding the annually adjusted amount

Benefits Excluded from Imputed Income

Health insurance for dependents
Health savings accounts
Education assistance under $5,250
Dependent care assistance under $5,000
Group term life insurance under $50,000
Adoption assistance below the annually adjusted amount
Small or occasional employer gifts, like a birthday cake or a company t-shirt

How to Calculate Imputed Income

Companies calculate this income based on the specific employee benefits and services provided. They generally follow these five steps to calculate it:

Identify the benefit: Firstly, identify which employer-provided non-cash benefits are classified as imputed income under applicable tax regulations.

Estimate Fair market value: Secondly, determine the benefit’s fair market value. This represents the price an individual would pay for the same benefit if purchased in the open market.

Deduct any employee contributions: Thirdly, if the employee covers a portion of the benefit’s cost, subtract that amount from the fair market value.

Apply applicable exclusions: Certain benefits may qualify for exclusions or limits under tax regulations. Apply tax exclusions or limits to qualifying benefits to reduce their taxable value.

Determine the imputed income: Finally, treat the remaining amount as imputed income and add it to the employee’s gross taxable income.

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Frequently Asked Questions

Q1.	What is imputed income and how does it work?
Ans.	It is the non-cash compensation or extra perks that an employee receives, for instance, a gym membership, a gift card, or education assistance. In general, these employee perks, taxable under tax laws, are not considered a part of their basic salaries and are employer-provided benefits. Moreover, employees are expected to pay the tax on the value of these benefits.
Q2.	Which employee benefits are considered imputed income?
Ans.	Some of the benefits, like employer-paid gym memberships, personal use of a company-owned vehicle, and dependent care assistance, are considered imputed income. Additionally, other examples of this include group-term life insurance, health insurance for domestic partner, education assistance, adoption assistance, and transportation benefits.
Q3.	How is imputed income calculated for a company car or housing?
Ans.	These are generally determined by using the fair market value of the personal benefit received, minus any amount paid by the employee.
Q4.	Does imputed income increase my taxable income?
Ans.	Yes, it increases your taxable gross income. Basically, it’s included in gross income on W-2 forms and is subject to federal and state income taxes and FICA (Social Security and Medicare) taxes.
Q5.	How do employers report imputed income on a W-2?
Ans.	Employers must report taxable fringe benefits as imputed income on each employee’s Form W-2. The value of these benefits is included in Boxes 1, 3, and 5, and specifically reported in Box 12 using Code C. Importantly, employers may record imputed income periodically or annually, but it must be reported by January 31 of the year the benefits are provided.
Q6.	Are gym memberships or education assistance taxed as imputed income?
Ans.	To clarify, gym memberships and educational assistance may be taxed as imputed income, depending on how they are provided and whether they meet tax exemption rules. However, gym memberships are generally not taxed as imputed income when the fitness facility is located on the employer’s premises and meets the requirements for an on-site facility benefit. Whereas, off-site or reimbursed gym memberships are usually considered taxable. Similarly, Educational assistance is tax-free only if it’s under $5,250. Any amount that exceeds this threshold is treated as imputed income and included in the employee’s taxable wages.
Q7.	Is imputed income included in gross pay?
Ans.	Yes, it is included in the employee’s gross pay and reported on Form W-2, Wage and Tax Statement.
Q8.	How is imputed income taxed under federal and FICA rules?
Ans.	It is taxed as part of an employee’s gross taxable income under federal tax rules. In addition, it is also subject to FICA taxes, hence both Social Security and Medicare taxes apply.
Q9.	Are all fringe benefits taxable or are some exempt?
Ans.	Fringe benefits are taxable unless they are specifically exempted under tax laws.
Q10.	What are the IRS guidelines for reporting imputed income?
Ans.	The IRS requires employers to report imputed pay from taxable fringe benefits as part of an employee’s gross income. Next, employers must determine the fair market value of the benefit, subtract any employee contribution, and furthermore apply any applicable exclusions before calculating the taxable amount. The final imputed income must be included on Form W-2, reported in Boxes 1, 3, and 5, and shown in Box 12 using Code C. Employers may also report imputed income periodically or annually, but it must be reported by January 31 of the year in which the benefit is provided.