What Does Imputed Income Mean?
Imputed income is the monetary value of benefits offered or provided by employers to their employees. Not all benefits coming solely from an employer and/or their business are considered imputed income by the IRS. However, imputed income as defined by the IRS is taxable and must be reported on employee W2 forms by the employer.
Is Imputed Income a Fringe Benefit?
The difference between a fringe benefit and imputed income is that some fringe benefits are considered actual benefits. In this case, there is no cash value applied to a fringe benefit. Company health insurance that covers an employee is not a fringe benefit. However, if this company health insurance also covers the employee’s dependents, that coverage is considered a fringe benefit.
Note that the IRS does consider some fringe benefits as imputed income.
Taxable fringe benefits include but are not limited to:
- Commuter and parking fees paid by the employer that exceed $280 per month
- Group term life insurance exceeding $50,000
- Awards, gift cards, and cash sponsored by the business
What are Examples of Imputed Income?
Imputed income ranges from gym memberships to educational assistance and company cell phone plans.
Here is a list of common types of imputed income:
- Gym memberships and fitness incentives
- Employee discounts
- Relocation reimbursement for employees who move specifically to work for the company
- Adoption assistance exceeding the tax-free amount ($14,890 per child for the tax year 2022)
- Group term life insurance exceeding $50,000
- Educational assistance for courses that are not associated with company positions (i.e., a restaurant employee receives funds to pay tuition for courses they are taking to earn a BA in history)
- Personal use of a company vehicle or cell phone
How Do I Know If I Received Imputed Income?
Employers are supposed to include imputed income on employee W2 forms. Medicare and Social Security taxes must be withheld from an employee’s imputed income. Taxable imputable income is combined with an employee’s wages.
Familiarizing yourself with what the IRS considers taxable and non-taxable imputed income is the best way to know ahead of time whether your yearly taxable income amount will be higher than expected.
What Does the IRS Exclude From Imputed Income?
- Health insurance benefits
- Company awards not exceeding $1,600 (in value or in cash)
- Dependent care assistance not exceeding $5,000 annually
- Health savings accounts
- Occasional meals (i.e., one-off holiday or anniversary lunches)
- Retirement services that involve help with planning for retirement, submitting Social Security forms, and/or applying for Medicare
- Graduate-level tuition expenses if the employee is seeking a research or teaching doctorate
Do I Pay Taxes on Imputed Income?
Yes, imputed income is taxed at the same federal income tax rate a person normally applies to their W2 income. An exemption to this rule is when imputed income exceeds $1 million. The IRS tax rate for $1 million or more of imputed income is 37%.
Sometimes, earning imputed income can change an individual’s tax bracket. For example, Jill made $85,000 from wages and $7,000 from imputed income. She must add the $7,000 to her wages when filing taxes. If the new amount puts her in a higher tax bracket, she will need to apply the new tax rate, not the original tax rate based on wages alone.
What are the Penalties for Not Reporting Imputed Income?
If a taxpayer does not add their taxable imputed income to their total income, the IRS will identify and correct the mistake plus charge penalties for any past due tax debt incurred due to not including imputed income.
The IRS may send notice of penalties in the mail to individual taxpayers and employers when imputed income is not reported.
Types of unreported imputed income penalties include:
- Failure to file
- Failure to pay
- Wrongful claim for credit or return
- Information return
- Underpayment of estimated tax by businesses or individuals
How Can I Reduce My Imputed Income Tax Liability?
The only way to reduce any kind of tax liability is to reduce the amount of your taxable gross income. Reducing imputed income tax liabilities basically involves avoiding excess amounts of non-cash perks and taxable fringe benefits that otherwise put you in a tax bracket with a higher tax rate.
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