What Is Imputed Income On A Paycheck?

Imputed income refers to the monetary value of specific non-cash benefits granted to employees, contractors, or other laborers. As actual imputed income is subject to taxation, it must be disclosed on tax forms such as the W-2 form as a component of employees’ compensation. Benefits are not all imputed income. In this article, they are issued by the IRS to assist employers in determining whether the benefits they offer qualify as imputed income.

What Is Imputed Income?

Assigning value to cash or non-cash employee compensation to accurately withhold employment and income taxes is “imputed income.” Imputed income can be defined as the monetary worth of any services or benefits that are rendered to an employee. Additionally, cash and non-currency forms of compensation are considered to provide an accurate representation of an individual’s taxable income.

Imputed income generally comprises supplementary benefits. Imputed income must be added to an employee’s gross wages for employers to withhold employment taxes precisely. Incorporate imputed income into the net compensation of an employee.

Employers classify imputed wages as income; therefore, imputed income must be taxed unless an employee is exempt.

The use of presumed income is particularly prevalent when determining child or spousal support in family law cases.

Types Of Imputed Income

It is your responsibility as an employer to understand what constitutes imputed income. The following are examples of imputed revenue types:

• Dependent care assistance over the tax-free threshold
• Group term life insurance over $50,000
• Adoption aid over the tax-exempt threshold
• Private use of the employer’s vehicle
• Assistance with employee education over the excluded amount
• Rebates for relocation expenses that are not deductible
• Fitness memberships or incentives
• Employee reductions

What Are Fringe Benefits?

Actual benefits provided to contractors, directors, partners, employees, and their dependents, in addition to other company personnel, are referred to as fringe benefits. As an illustration, health insurance may provide coverage for employees and their dependents. Fringe benefits designated for an employee’s dependents are classified as employee-assigned benefits. Certain perquisite benefits qualify as imputed income.

What Is Included In Imputed Income?

As imputed income, the Internal Revenue Service (IRS) provides an inventory of fringe benefits. However, some are exempt to a specific degree. The following is a list of taxable benefits and any restrictions or limitations that might affect their status as imputed income.

• Term insurance for groups (if more than $50,000)
• Aid for education (if more than $5,250 annually)
• Award certificates that qualify (if more than $1,600 in value)
• Reduction in graduate-level tuition (in the absence of teaching or research responsibilities by the employee).
• Fitness incentives and gym memberships (if the gym is not on company property and is restricted to employees and their dependents only).
• Adoption assistance (if more than $14,890 by 2022’s limit): this provision is exclusive of income tax withholding.
• Moving expense reimbursement does not apply to active-duty United States Armed Forces members unless their relocation is a permanent alteration necessitated by a military order.
• Recommelatory bicycle commuting expenses
• Assistance for dependent care (if exceeding $5,000 annually)

What Is Excluded From Imputed Income?

As detailed by the IRS, several perquisite benefits are excluded from imputed income. While sure of them have been included on our inclusion list, they qualify as exempt discretionary benefits due to specific criteria surrounding them.

Detailed below is a list of perquisite benefits that are categorically excluded and those that are excluded under particular conditions. In addition, we specify any conditions that affect their exempt or non-exempt status.

• Health and accident benefits
• The value of achievement awards can reach $1,600.
• Adoption assistance (excluding Social Security, Medicare, and federal unemployment from income tax withholding).
• Annual dependent care assistance of up to $5,000
• Educational yearly aid of up to $5,250
• Employment benefits include discounts on services, which can reach up to 20%; for products, the formula is the employer’s total profit percentage multiplied by the regular price.
• Employer-supplied mobile device
• Coverage for group term life insurance below $50,000
• Medications investment plans
• Meals, if not routine
• Services for arranging retirement
• Reduction in tuition (at the graduate level in exchange for instruction or research).

Examples Of Imputed Income

Already, we have provided an extensive enumeration of instances involving imputed income. Although most of them are uncomplicated (either imputed income or exclusions), a few lie somewhere in between.

Specific criteria, when satisfied, classify these as imputed or excluded income. A few examples of these types of perquisite benefits are provided below, along with an explanation of when they qualify as imputed income subject to taxation and when they do not.

1. Gym membership: Numerous organizations provide fitness-related perks, including gym memberships, to enhance employee health and morale. Employees should have their implanted income reported if they are granted access to a gym membership that is not located on company property and is restricted to staff only.

2. Achievement awards: For accomplishments such as the duration of service to the company, numerous businesses offer achievement awards in the form of cash, gift cards, coupons, gift certificates, or other cash equivalents. These are not considered imputed income so long as their value does not surpass $1,600. Exceeding this threshold shall be regarded as imputed income subject to taxation.

3. Educational assistance: Educational assistance for an undergraduate program amounting to $5,250 or less annually may be excluded from imputed income. This graduate-level assistance may also be available to professional research or teaching personnel. Any graduate programs or assistance surpassing this threshold amount must be disclosed as imputed income.

4. Moving expense reimbursement: To recruit high-caliber personnel, numerous employers provide financial assistance for moving expenses of qualified employees outside the employer’s office’s daily commute radius. This reimbursement amount must be consistently categorized as imputed income unless reimbursed to active members of the United States Armed Forces who are relocating permanently per a military directive.

5. Adoption assistance: Adoption assistance is only considered imputed income for federal unemployment, Social Security, and Medicare withholdings, not for income tax withholdings. A federal adoption tax credit potentially shields up to $14,890 from taxable income in 2022.

Regarding the circumstances under which the IRS considers a prerequisite benefit to be credited or excluded income, it is critical to peruse the fine print. Excessive amounts beyond the limits of numerous exclusions necessitate reporting the surplus as imputed income. Diligently adhering to these regulations can aid employers and workers in circumventing tax penalties.

What Is Imputed Income On A Paycheck?

• Social Security and Medicare taxes (FICA) must be withheld from the imputed income of employees.
• There is no obligation to withhold federal taxes from imputed earnings. However, there are circumstances in which imputed income is subject to federal income tax withholding.
• The option exists for employees to deduct federal income tax from imputed pay. Alternatively, they may include the federal income tax liability in their income tax return payment.
• Notify employees that withholding an adequate federal tax on imputed income may result in tax penalties.
• Please communicate with the IRS directly for inquiries about the requirements and exemptions of imputed income tax withholding.

Although presumed income may appear complex to some, its fundamentals are surprisingly simple. Imputed income refers to the amount by which an individual’s income surpasses the threshold for a particular tax bracket, but their deductions fall short of completely offsetting that income.

For instance, when an individual earns $1,500 in a given month before taxes but possesses a deductible of only $100 to mitigate that sum, the government will compute the individual’s income as $1,400. This is because the $100 and the $1,400 would qualify as taxable income.

How To Report Imputed Income?

For Form W-2 to accurately reflect the taxable wage-related income of an employee, imputed income must be included. Report imputed income for each applicable employee on Form W-2. Input imputed income using Code C in Box 12 of Form W-2. Additionally, Boxes 1, 3, and 5 should include the imputed income amount.

It is important to note that imputed income generally does not incur federal income tax withholding. Nevertheless, imputed income becomes liable for withholding Social Security and Medicare taxes.

Imputed income refers to income subject to taxation based on employee benefits in non-cash forms. Not all intangible benefits qualify as imputed income and are subject to tax. By consulting IRS-published guidelines, employers can determine whether their benefits should be reported as attributed. The value of imputed income from provided benefits should be disclosed on employees’ W-2s and other comparable tax forms.

Thank you for reading….