What Is Imputed Income And Why Does It Matter?

Employee benefits and compensation can take many forms — and the IRS is watching them all closely. Whether you're gifted a company-wide bonus in the form of a gift card or cruising around in a company vehicle, you may need to pay taxes.

So, what is imputed income exactly, and why should you care? These fringe benefits might sneak into your taxable income, so it's helpful to understand how to calculate imputed income, especially if you are getting ready to file your tax return.

Imputed Income Explained

Imputed income refers to the value of benefits or perks you receive from your employer that are not included in your regular salary or wages. These benefits can vary from company cars and housing allowances to health insurance premiums and even free or discounted meals. In other words, imputed income is compensation not paid directly in cash.

Although imputed income seems like a perk, the IRS might tax it. Since the IRS views it as income, it must be factored into your tax returns and can impact how much you owe or receive as a refund. However, not all forms of imputed income are taxable, including group-term life insurance, certain educational benefits, and employee discounts.

Fringe Benefits

Fringe benefits encompass additional goods, stipends, experiences, or services that employees receive on top of their regular salary. These fringe benefits are subject to taxation and can impact personal budgeting. For example, if you are rewarded with a $100 gift card for accomplishing a project ahead of schedule, the value of that gift card needs to be reported as imputed income.

Non-Taxable Fringe Benefits

While some fringe benefits are taxed as imputed income, the IRS does not tax certain types. Non-taxable fringe benefits can include group-term life insurance, health savings accounts, and certain educational assistance programs.

The main difference between taxable and non-taxable fringe benefits is that non-taxable benefits do not need to be reported as income on an employee's tax return. It's important to speak with your employer or tax professional to understand which fringe benefits you are eligible for, as well as their tax implications.

Imputed Income Examples

Below are some examples of imputed income you might receive from your employer.

Family

• Employer-paid life insurance coverage exceeding $50,000.
• Dependent care assistance, such as employer-provided daycare services or subsidies.
• Adoption assistance, where the employer covers a portion of the adoption expenses.
• Company-provided scholarships for employees' children.

Health

• Employer-paid health insurance premiums for employees and their dependents.
• Health savings account (HSA) contributions made by the employer.
• On-site employee health clinics.
• Wellness programs with gym membership or fitness classes.

Education

• Tuition and education assistance programs where the employer contributes toward the employee's education expenses.
• Employer-sponsored continuing education or professional development courses.
• Expense reimbursement for educational materials and books.
• Employer-paid student loan repayment programs.

Home And Auto

• Employer-provided housing, such as a company-owned apartment or housing allowance.
• Commuting benefits, such as free parking or employer-subsidized public transportation passes.
• Company cars for personal use.
• Discounts on home or auto insurance offered by the employer.

FAQs: Imputed Income And Its Effect On Taxes And Paychecks

Read on for straightforward answers to your questions on imputed income, covering everything from tax implications to its impact on your take-home pay.

How does imputed income impact my paycheck?

Imputed income typically does not directly impact your paycheck; instead, it primarily affects the amount you pay in taxes. However, in certain cases where a company offers substantial fringe benefits, it may view those benefits as part of your overall compensation package, potentially leading to a lower salary reflected in your paycheck.

Will I have to pay taxes on imputed income?

Imputed income may be subject to taxation. When calculating taxes, the imputed income is generally added to your total income and included in your adjusted gross income (AGI) on your tax return. AGI is calculated by subtracting certain adjustments from your total income, such as educator expenses, student loan interest, alimony payments, and retirement contributions. The IRS uses your AGI to determine your taxable income and tax bracket for your federal income taxes.

How do I go about reporting imputed income?

Reporting imputed income to the IRS is straightforward. Typically, your employer will include the imputed income amount on your W-2 form in Box 1, along with your regular wages. When filing your taxes, you'll simply include this total income amount on the appropriate line of your tax return, ensuring accurate reporting to the IRS.

The Bottom Line

Although imputed income does not usually directly impact your paycheck, it may affect the amount you pay in taxes. Understanding how imputed income is calculated and reported is important so you can include it on your tax return as needed.

Tracking your imputed income can make tax season easier. Sign up for the Rocket Money℠ app to get started.