What is imputed income? Examples and Exclusions
Imputed income is the value of any non-cash benefit or service that an employer provides to an employee, which is considered taxable income.
This income adds to an employee’s gross earnings and is subject to federal income tax.
Examples include fringe benefits like group term life insurance exceeding the tax-free amount, dependent care assistance beyond the tax-exempt limit, personal use of a company car, health insurance for domestic partners, gym memberships, educational assistance, and gift cards.
What Are Fringe Benefits?
Fringe benefits refer to the tangible benefits provided to employees, their dependents, and other staff members such as contractors, directors, and partners.
For instance, health insurance can extend coverage to an employee and their dependents. When these benefits also support an employee’s dependents, they fall under the category of fringe benefits linked to the employee. Certain fringe benefits qualify as imputed income.
Examples
Imputed income arises from certain fringe benefits provided by employers. These benefits can vary widely, from gym memberships to educational assistance.
Understanding when these benefits count as fringe benefits for tax purposes is crucial for both employers and employees.
Here’s a closer look at some examples:
Gym Membership
Providing employees with a free or discounted gym membership is a popular fringe benefit. When an employer covers the cost of a gym membership, this benefit can become imputed income. The value of the membership is added to the employee’s taxable income unless it’s specifically excluded under tax law.
Achievement Awards
Awards given to employees for length of service or safety achievements can also be considered fringe benefits if they exceed certain IRS thresholds or if they are not awarded as part of a meaningful presentation. However, tangible personal property given as an award may not count as imputed income up to a certain limit.
Educational Assistance
Employers may offer educational assistance benefits, covering costs for tuition, books, and related educational fees. This assistance becomes imputed income when it exceeds the tax-free assistance limit set by the IRS per year. Educational benefits below this limit are not taxable.
Moving Expense Reimbursement
Previously, some moving expense reimbursements provided by employers to employees for job-related relocations were tax-exempt.
However, recent tax law changes have made most moving expense reimbursements taxable, counting as imputed income, except for members of the Armed Forces on active duty moving under military orders.
Adoption Assistance
Employers may offer adoption assistance to cover expenses related to the adoption process. This benefit is considered imputed income when it exceeds the annual exclusion limit set by the IRS. Any assistance under this limit is tax-free.
These examples highlight the importance of understanding which fringe benefits are taxable as fringe benefits. Both employers and employees must be aware of these rules to correctly report taxable wages and comply with IRS regulations.
What Is Excluded From Imputed Income?
The IRS identifies a range of fringe benefits that don’t count as imputed income, with some conditions applying that may exempt these benefits. Below, we detail these fringe benefits, highlighting those that are always exempt and those with specific conditions affecting their tax status.
Accident and health benefits: Generally not considered income. Achievement awards: Exempt up to a value of $1,600. Adoption assistance: Not subject to income tax withholding, though still liable for Social Security, Medicare, and federal unemployment taxes. Dependent care assistance: Exempt up to $5,000 annually. Educational assistance: Can be exempt up to $5,250 each year. Employment discounts: Services can receive up to a 20% discount; for products, exemption depends on a calculation involving the employer’s gross profit percentage. Employer-provided cellphone: Typically exempt from being considered as imputed income. Group term life insurance: Coverage under $50,000 is exempt. Health savings accounts (HSAs): Not counted as imputed. Meals: Occasional meals provided by the employer are exempt. Retirement planning services: These services are not considered imputed income. Tuition reduction: Exempt at the graduate level if the individual is engaged in teaching or research activities.This list clarifies which benefits are not imputed income, either outright or under specific conditions, helping employers and employees understand their tax obligations.
How To Report It as taxable income?
Employers must add the value of imputed income to an employee’s taxable wages. They report this income on W-2 forms, which then informs how much federal income tax and employment taxes apply. Employees use these forms to file their tax returns, including imputed income as part of their taxable income.
What is imputed income on a paycheck?
Imputed income on a paycheck is the value of non-cash benefits that an employer provides. This amount appears as taxable wages on your paycheck, increasing your gross income.
Do I pay taxes on imputed income?
Yes, you pay federal income taxes on imputed income. The value of certain non-cash benefits from your employer counts as taxable income.
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