What is imputed income?

Imputed income refers to employees’ taxable benefits not included in their regular salary or wages. These perks don’t directly pay employees, but they’re still taxed based on their value. 

For example, if an employee has the benefit of a company car, their taxes are calculated on the lease equivalent of the vehicle. Some benefits, such as health insurance or meals provided by the employer, may be exempt from taxation. Now that you know what imputed income is, let’s explore its complexities and rules.

Examples of imputed income

If the benefits aren’t monetary, then why is imputed income deducted from your paycheck? It represents the taxable value of non-cash benefits you receive from your employer, such as employer-provided housing, a health spending account, or fitness center memberships. These benefits are vital components of one’s total compensation package, providing perks that supplement standard wages to attract and retain top talent.  Because it is taxed, employers should report imputed income on pay stubs.

Here’s a list of several typical forms of imputed income, highlighting how they are taxed in the United States and under what circumstances they might affect an employee’s taxable income:

• Use of a company car: Employees who use a company car for personal activities must report the value as imputed income. This value is included in the employee’s income and subject to payroll deductions to cover the tax liability.
• Health insurance premiums for nondependents: If an employer pays for health insurance that covers nondependents in addition to the employee, the value of that extra coverage is considered imputed income.
• Fitness or wellness benefits: When an employer provides gym or wellness program memberships, the value of these benefits is taxable and counted as imputed income.
• Education assistance: The IRS exempts up to $5,250 of educational assistance under employer-provided educational programs. Any amount over this is taxable and treated as imputed income.
• Employer-provided housing: If an employer offers housing or a housing allowance and it’s not necessary for the job or the employer’s convenience, its value is considered imputed income.
• Moving expenses: Recent tax law changes have made employer reimbursement for moving expenses imputed income that is taxable to the employee (unless related to military service).
• Adoption assistance: Employer-provided adoption assistance is generally tax-free up to a certain amount. Amounts that exceed this annually-adjusted limit are taxed as imputed income.

What’s excluded from imputed income?

Employers’ benefits are not considered imputed income if they fall below specific value thresholds or qualify for tax-exempt status. This exclusion helps employers and employees by simplifying taxation and providing clear guidelines on what contributes to taxable income. Here are some examples of exclusions from imputed income:

• Health insurance for dependents: Premiums paid by employers for their employees’ dependents are typically exempt, meaning they aren’t considered taxable income.
• Small or occasional gifts: Infrequent, low-value presents (e.g., movie tickets, a birthday cake, or a company T-shirt) are not counted as imputed income.
• Health savings accounts (HSAs): Up to a specific limit (designated by your employer), employer contributions to an employee’s HSA are excluded from taxable income.
• Employee snacks or meals: Food is generally not taxable as imputed income if provided occasionally and on the employer’s premises.
• Dependent care assistance: This benefit is excluded from imputed income if under $5,000 annually, helping employees manage childcare costs effectively.

How to report imputed income 

Employers must accurately report imputed income to ensure compliance with tax regulations. They withhold the necessary taxes from employees’ paychecks, similar to other types of income, and then detail those amounts on specific tax forms. Here’s how to report imputed income:

1. For most employees: Employers should report the value of imputed income on the employee’s W-2 form. The taxable value of any fringe benefits should be included in box 1 and also boxes 3 and 5, if applicable. Additionally, itemizing these benefits in box 14 is helpful for clarity.
2. For agricultural employees: Imputed income for employees in the farming sector must be reported separately on Form 943, which is specifically designed for agricultural employers.
3. For very small employers: Those who employ only a few workers and meet specific criteria should report imputed income on Form 944. This form is for smaller employers to simplify their annual reporting duties.

Note that not all deductions are pre-tax. Post-tax deductions—which do not reduce taxable income but are subtracted after taxes have been calculated—cover various items, from Roth IRA contributions to legal garnishments.

How does imputed income affect an employee’s tax return?

Imputed income, detailed separately on your pay stub from regular earnings, includes non-cash benefits contributing to your total taxable income. This can influence how your taxes are calculated. Here’s an overview of how these benefits impact your taxation:

• Taxable benefits: The taxation of imputed income depends on the type and value of the benefit. Benefits not considered de minimis (those significant enough to warrant tracking and valuation over $100) are added to your gross taxable income.
• FICA contributions: Both you and your employer are responsible for paying FICA taxes on most forms of imputed income. This includes contributions to Social Security and Medicare. The inclusion of imputed income in your taxable earnings means that it affects your FICA tax calculations in the same way as your regular income.
• Federal income tax rates: Imputed income is taxed at your regular federal tax rate. Any taxable benefit is grouped with your other income and subjected to the same tax brackets unless the value of a particular benefit (e.g., a company bonus or stock options) exceeds $1 million, in which case a higher tax rate of 37% may apply.
• Special withholding rate: In some instances, employers might apply a flat supplemental wage rate of 22% to the value of taxable benefits, mainly when precise tax bracket placement is uncertain.

By understanding these aspects, employees can better manage their expectations regarding their take-home pay and prepare for any potential impacts on their annual tax returns.

Reward your global team while maintaining compliance

A well-defined imputed income policy ensures your organization complies with tax laws and avoids surprises. Oyster can help by empowering your company to build diverse, high-performing teams worldwide. Offer competitive salaries, provide attractive benefits packages, and easily navigate taxes and local regulations around the world.