Imputed income refers to the value assigned to a non-monetary benefit or perk received by an individual, which is then treated as taxable income. In other words, when a company or employer offers a non-traditional benefit – such as a gym membership, or an annual Amazon gift card – the value of that benefit is taxed as imputed income, on the employee’s side. This means it impacts both the employer’s and the employee’s tax liabilities.
Imputed income is not limited to smaller fringe benefits. It includes the value of a company car, employer-provided housing, personal use of company assets, and even employee discounts in stores. It is also subject to taxation, even though it is not received in the form of traditional compensation.
To be even more specific, imputed income is not necessarily tied solely to the employee-employer relationship. As a concept within taxation, it refers to any source of wealth that can be attributed to a person when they avoid paying for it by being provided the service, as a bonus or benefit. Owning your own home instead of renting one can be a source of imputed income.
Unlike the imputed income derived from owning the property you don’t have to pay rent for, however, imputed income generated through the employee-employer relationship must be reported and taxed.
Types of Imputed Income
Imputed income can be split into a few different sources of non-cash benefits. These include:
Stock options and stock units
Housing or other accommodations
Health insurance premiums
Employer-provided benefits (outside of what is tax exempted)
Various sources of non-cash compensation (gift cards, prizes, awards)
Not all non-cash benefits result in imputed income. Certain benefits can be tax-free or tax-advantaged, meaning they aren’t taxed as income, or taxed at a lower rate.
For example, while the company car itself isn’t tax-free, the parking space attributed to the car is. Certain childcare benefits, health benefits, and limited employee discounts can be tax-free. A more in-depth employer tax guide can be reviewed via the IRS’ official publication on fringe benefits, titled Publication 15-B.
Furthermore, the wealth generated through certain forms of investments in the form of unpaid dividends or accrued interest, even if not received in cash, may count as a source of imputed income.
Should You Track Your Imputed Income?
Employers and employees must both keep track of imputed income, but it’s important to draw the line somewhere. For the IRS, that line is $100. Non-cash benefits provided to employees under the total value of at least $100 are considered de minimis, or too minor to count as a form of this type of income.
This means that certain non-cash benefits can safely be ignored on your tax return, such as:
The flowers you got from your boss
A concert ticket worth less than $100
Company-branded apparel or merchandise
Low market-value gifts
Snacks or most meals
Personal use of the copy machine or scanner
Benefits that are over $100 and aren’t explicitly tax-free will need to be tracked on your income tax return, as imputed income. It is taxed at the same rate as your regular income, unless the value of your non-cash benefits exceeds $1 million, in which case the tax rate is 37 percent.
Serious non-cash benefits that may lead to a significant amount of tax include:
Education assistance (if in the value of over $5,250 per year)
Gym memberships (if the gym isn’t on company grounds)
Dependent care assistance (over $5,000 per year)
Group term life insurance (over $50,000 policy value)
Adoption assistance (over $15,950 in 2023, value changes annually)
Student debt forgiveness
As you might notice, there are significant exemptions in place for most non-cash benefits, which limits the amount of imputed income you actually need to report. Only the excess of the IRS’ exemptions must be reported as imputed income, not everything you’ve been gifted as a non-cash work-related benefit.
How To Compute Imputed Income
Non-cash benefits should be listed on your pay stub and must be reported on your Form W-2, which your employer will fill out. Some pay stubs note non-cash benefits, while others list them as “fringe benefits”.
In either case, employees simply need to report their accumulated annual imputed income as per their pay stubs or Form W-2, while employers are required to keep track of the non-de minimis fringe benefits or non-cash benefits that they provide to their employees.
Review the IRS’ exemptions and limitations for non-cash benefits. Are you well within the limits on what has been provided to you as a non-cash benefit? Then you might not need to worry about it. However, know that your tax situation – and the IRS’ rules – can be fluid. If you aren’t sure, it’s always in your best interest to contact and speak to a tax professional, and to rule out a potential tax debt.
Owing taxes is no fun, and the IRS can be one of the meanest creditors around.
Importance of Understanding Imputed Income
More and more companies are shifting towards offering non-cash benefits to employees as a way to attract new talent, whether it’s in the form of restricted stock options or a fancy company car, or even company-provided housing and daycare for the kids. Other businesses are focused on paying for their employees’ continuing education and investing in their skill sets. These benefits can help the employer-employee relationship, but just because it isn’t part of the paycheck doesn’t mean it isn’t a form of taxable compensation.
You don’t want to be on the IRS’ bad side. Whether you’re an employer trying to balance the books correctly or an employee anxious about their tax returns, it always pays to ask.
Ready to learn more about various sources of imputed income, and how it can impact your tax situation? Contact Rush Tax Resolution today for expert guidance. We will help you navigate the requirements for reporting your imputed income, as well as important considerations for businesses interested in offering niche or fringe benefits as part of their value proposition for new talent.