Payroll guide: imputed income
In this guide, we'll explain imputed income and dive into what benefits fall under it.
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1 minute
October 2, 2024
Kevin Flynn is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.
Accounting terminology can be confusing. At first glance, “imputed” looks like “inputted.” The two concepts are not interchangeable. If you’re a small business owner or CFO, it’s important to understand the difference so your company can properly report imputed income. This article will explain how it works. Some key takeaways to look for are:
Imputed income is an accounting term that refers to the cash value of the benefits your company provides to its employees. It must be reported as part of an employee’s compensation, so it’s taxable income.
In general, it's a good idea to ask an accountant about this.
Imputed income rules published by the IRS don’t require you to declare all benefits in this category.
One of the simplest examples of imputed income is the cash value of a gym membership offered to employees.
That value will be taxed based on their IRS tax bracket. Your payroll administrator can withhold that tax if the employee specifically requests it. If not, the employee will pay it when they file their federal tax return.
Fringe benefits are the actual benefits provided by the company as incentives to employees, contractors, partners, or directors. Life insurance is an example of a fringe benefit. It’s also taxable as imputed income, along with the other benefits on this list:
An imputed contribution is money withheld to cover the tax liability of an imputed benefit. For instance, if a gym membership is worth $1,000 and the employee is in a 22% tax bracket, the imputed contribution to withholding would be $220. Making that contribution voluntarily during the year eliminates that tax liability when the employee files their year-end return.
Employer contributions to a 401(k) retirement account, either in cash or as a stock match, are not imputed income because the employee doesn’t pay taxes on that money until they withdraw it in retirement.
Imputed income is relevant in several areas. This section breaks down some of those to better illustrate why tax planning for imputed income is important.
Adoption and dependent care assistance are imputed income that can affect your family. You can exclude up to $15,950 in adoption assistance from your imputed income. Dependent care assistance is excluded up to $5,000 per year. These two exemptions could add up to several thousand dollars in tax relief for your employees. Make sure they know that.
Health insurance and accident benefits are non-taxable fringe benefits, not imputed income. An employer-sponsored gym membership, which we used as an example above, is imputed income. If you want to put it in the health category, group term life insurance is tax-exempt, up to $50,000. Consider that carefully if you offer it as an employee benefit.
Tuition reimbursement and other education assistance are incentives that can benefit the employer as much as the employee. The IRS exempts up to $5,250 in education benefits. Anything over that needs to be reported as taxable imputed income. Any tax withholding should include FICA, Medicare taxes, Social Security, and federal income tax.
Granting personal use of a company car (PUCC) to commute to and from work is imputed income. There are several ways to calculate that value. One is a general valuation method to determine the fair market value. Another is the “annual lease valuation rule,” which assesses the value as a percentage of the annual lease value (ALV).
Imputed income is taxable, but some fringe benefits are tax-free. Your company is not required to withhold taxes on imputed income, but an employee can request that you do so. They’ll need your payroll administrator to calculate the withholding amount to do that correctly.
The total imputed income is added to an employee's gross income to generate the number for Box 1 of a W-2 form (Taxable Wages, Tips, and Other Compensation). That number represents your total gross income. It determines the employee’s tax bracket and is used to assess the total income tax owed. Here’s what the IRS 2024 tax rate brackets look like:
If an employee who files taxes as an individual makes $96,000 annually in regular income and receives $5,000 in taxable fringe benefits, the imputed income from the benefits puts them into a higher tax bracket. Instead of paying 22%, they’ll be liable for a 24% federal income tax on a higher amount. That could significantly affect a federal tax return.
Employers who don’t disclose this to employees receiving fringe benefits may face difficult questions about their benefit package. In the scenario above, an uninformed employee won’t request additional withholding for imputed income, so the payroll administrator will only withhold enough to pay 22% of $96,000 ($21,120) when it should be 24% of $101,000 ($24,240).
In general, it's a good idea to consult a tax professional about this.
Smaller employers whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less can report imputed income using IRS Form 944. All other employers must report on Form W-2 in boxes 1, 3, and 5. The total fair market value for all fringe benefits imputed income should be listed in Box 14.
Imputed income in categories that don’t have exclusions or limits can simply be listed as their fair market value. Other items may require some mathematical calculations. Group-term life insurance is an example. The IRS exempts up to $50,000, so you’ll need to subtract that from the total benefit value and then use the insurance company charts to determine fair value.
Imputed income is the fair market value of taxable fringe benefits an employee receives from their employer. Common examples of this are gym memberships and group-term life insurance.
Imputed income is reported along with standard income (wages, tips, and other compensation) in Box 1 or a W-2 form. It should also be listed in Box 14.
Employees who receive taxable fringe benefits from their employers have Imputed income. Those who don’t receive benefits do not have imputed income.
Employees who receive de minimis fringe benefits are exempt from imputed income because the IRS considers those benefits too small or rare to require accounting.
No. Imputed income comes in the form of a non-cash benefit. 401k contributions are taken from income paid as wages or salary.
Imputed income does not affect an employee’s net pay. Fringe benefits are considered gross income, so they must be taxed after receiving them.
Imputed interest income is generally seen with intrafamily loans of $10,000 or more. Interest earned on intra-family loans under $10,000 is tax-exempt.
Imputed income should be recorded on a year-to-date basis on the employee’s paystub and in Box 14 of a W-2 form at the end of the year. It’s also added to the total income in Boxes 1, 3, and 5 of the W-2 form.
There are several ways to calculate that value. One is a general valuation method to determine the fair market value. Another is the “annual lease valuation rule,” which assesses the value as a percentage of the annual lease value (ALV).
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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.
