Imputed Income

What is Imputed Income?

Imputed income can be viewed as the financial equivalent of non-cash incentives or services a business owner provides to their staff. It represents the value of non-monetary benefits received by an employee in cash. A portion of this amount is added to the employee's gross income. 

Imputed income is excluded from an employee's net pay. It is because the benefit was already provided in a non-monetary form.

Therefore, even though the employee may not be required to pay for these specific benefits, they are nonetheless liable for the tax owed on their value.

How Does Imputed Income Affect Employee Taxes?

Unless imputed income is considered exempt, it must be included in the employee's gross income.

Imputed income is often not subjected to federal income tax withholding, but it is subject to Medicare, Social Security, and FUTA taxes. To account for the imputed income throughout the year, the employees can withhold a certain amount of tax or pay the taxes owed when they file their yearly tax-return.

What are the Examples of Imputed Income?

Many fringe benefits are taxed according to the value that the employee receives. Other benefits, however, are taxed regardless of their worth.

Employees need to be aware of what constitutes imputed income. Here are a few examples:

• Care assistance for an employee’s dependents exceeding the tax amount
• Fitness-related perks and others, such as gym memberships
• Non-tax-deductible moving expenses 
• Group term life insurance that exceeds $50,000
• Except for tax-deductible business travel; meals, and lodging,  
• Adoption assistance that exceeds a certain tax-free maximum amount annually
• Education assistance of the employee over a certain tax-free maximum
• Any vehicles provided to the employees 
• Non-bonus cash and gift cards since bonus tax is separate from imputed income tax

What is Excluded from Imputed Income?

Some benefits can also be excluded from imputed income. The following benefits are not qualified as imputed income:

• Holiday gifts
• Occasional entertainment purpose tickets
• Office snacks
• Reimbursements for any benefits the employee has already paid for 
• Any achievement awards exceeding $1,600 
• Transportation expenses or occasional meal money for overtime
• Commuter benefits that are up to a certain maximum amount
• Fruit baskets or floral arrangements
• Parties and team-building activities