Imputed Income: A Full Beginner’s Guide
Concepts like calculating imputed earnings and imputed income tax are what keep accountants in demand (and will continue to for the foreseeable future). It’s a necessity to keep track of imputed pay, and it’s not just the responsibility of payroll and accounting!
Every business owner needs to know it’s in’s and out’s, so in this article, we’ll examine what imputed income means, provide some examples of imputed income, and how to report imputed income.
Imputed Income: Definition
It can take the form of cash or non-cash compensation, but as long as it adds to that employees’ taxable income, it’s considered imputed income and should be represented on that person’s tax documents.
Examples Of Imputed Income
Here are a few examples to illustrate what kinds of things are considered imputed income, and must be recorded on the taxes as additional income.
We’ll compare them to those things which are exempt, or excluded from taxation that you can go ahead and leave off of your W2’s.
Taxable Imputed Income:
- Personal vehicle usage
- Group-term life insurance over $50,000
- Employee educational assistance over $5,250
- Moving expense reimbursements labeled as non-deductible
- Discounts for goods and services provided by the company exceeding the tax-free limit
- Gym memberships and similar fitness incentives
- Assistance with adoptions exceeding the tax-free amount allotted by the employer
- Assistance for care of dependents exceeding the tax-free amount allotted by the employer
Excluded From Taxation:
- Cellphones provided by the employer
- Group-term life insurance up to $50,000
- Employee educational assistance up to $5,250
- Meals during work travel or meetings
- Discounts for goods and services provided by the company up to the tax-free limit
- Health savings accounts, such as a “FLEX” account
- Assistance with adoptions up to the tax-free amount allotted by the employer
- Assistance for care of dependence within the tax-free amount allotted by the employer
Imputed income also applies to situations where child support is involved. This type of imputed income is different from the “perks” or “fringe benefits” an individual would ordinarily receive from an employer.
If an individual is voluntarily unemployed, or underemployed, the courts will use factors like past earning history, past employment history, educational level, etc. to calculate imputed income and adjust the payments owed for child support accordingly.
How To Report Imputed Income
Reporting your employees’ imputed income is less about when and more about assigning a value to the benefits they receive, but before we get into those details, there a couple of other noteworthy things to mention:
☝️ Imputed income is reported on the IRS W-2 form, in the appropriate box with a code indicating the type of benefit that was received.
☝️ Only add the value of imputed income to the total taxable income of your employee on their W2. Benefits considered to be exempt, that is, not imputed, should not be recorded with the total taxable income of your employee.
☝️ Imputed income IS NOT subject to federal withholding, so your employees are not paying taxes on that amount out of their weekly paychecks (unless they opt to do so). This doesn’t mean, however, they are exempt, as discussed above, the amount has to be included in the total adjusted gross income at the end of the year.
☝️ Imputed income IS subjected to employment tax withholding, though, so employees don’t need to pay additional employment tax at the end of the year because their employer reported imputed income on their W-2 forms that year.
Wondering how often to report imputed income? You can report per pay period, per quarter, semi-annually, or annually, but calendar-year benefits must be reported by December 31 of the year in which the benefits were received. Some choose to break it up into shorter time spans to make it easier to track and account for, but it’s really just a matter of preference depending on the amounts of imputed income you’re receiving.
Knowing the Value of Imputed Income
Determining the value of things that fall under the imputed income category can get a little tricky. There are some things that are pretty straightforward because the value is laid out numerically, like educational assistance and group-term life insurance.
Things like personal vehicle usage, moving expense reimbursements, company discounts for goods and services are a little more nuanced, however, when it comes to putting a numeric value on the taxable benefits. For example, here’s a little information about the IRS’s rules for how companies can calculate the imputed tax on employee discounts for goods and services.
When in doubt, consult the 15-B: Employer’s Tax Guide to Fringe Benefits to determine evaluation rules, exclusion rules, as well as rules for withholding, depositing and reporting in order to determine and record your employees’ imputed incomes correctly.
Easiest Way To Record Imputed Income
The easiest way to record imputed income is daily, or at least whenever your employees use the fringe benefits that qualify as imputed income. For instance, if you have an employee driving a company car, recording mileage and gas regularly saves a lot of time and headaches later when it comes time to report.
Log expenses effortlessly, share them with your accounting department & optimize your financial processes!
A handy tracking tool can be super helpful for recording things that may be considered as imputed income. It can help keep your company’s accounting accurate because it indicates the use of fringe benefits as congruent with the hours an employee is working.
For instance, if an employee uses a company vehicle during working hours, if you have a comprehensive tracking platform, that logs expenses like gas along with the mileage used, and subsequent depreciation of the vehicle based on the hours that employee tracked.
So as you can see, imputed income is simple… But sometimes assessing the value on something that’s considered a fringe benefit or “perk” isn’t so straightforward.
Thankfully, there are plenty of guides and resources out there from the IRS.Gov website for help in determining how to navigate those sometimes ambiguous waters.
Equally as important as understanding the value of your fringe benefits, is understanding how to record them in real-time. The best way to do this is with the kind of diligent time-keeping resources that Everhour offers, with the capability of logging expenses with no extra effort, share them with your accounting department, and optimize your financial processes!