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What is Imputed Income?
Imputed income is the amount assigned to benefits or services offered to an individual from an employer that the IRS deems to be tax-deductible. It is the benefits an employee gets from their employer. These benefits are not paid directly by way of wages but have an economic value.
This means it has to be included in the employee’s gross income and subject to federal income tax, social security, and Medicare taxes.
Common Examples of Imputed Income:
- Company-provided vehicles: When an employee receives an automobile from the company that they may use for personal reasons, the cost of this personal use will be considered an imputed amount of income.
- The Group-Term Life Insurance: Life insurance coverage greater than $50,000 is considered to be imputed income. The amount of coverage over this amount is tax-deductible.
- Dependent Care Aide: If a company offers aid to dependents that is greater than $5,000 during one calendar year, it is considered imputed earnings.
- Employer Discounts: Discounts on products or services offered by employers that surpass a certain amount can also be considered taxable Income.
- Housing Benefits: If a company provides accommodation or allowances for housing, the actual market price of the benefit could be considered imputed income, based on the situation.
- Domestic Partner Benefits: If an employer offers medical insurance or any other benefit to the partner of the employee’s domestic partner, the value of these benefits is often regarded as income imputed to an employee.
Why Imputed Income Matters:
Understanding imputed income is crucial since it can impact their tax obligations. Non-cash benefits can boost the tax-deductible income of the employee, which could lead to increased taxes or lower tax refunds. For employers, it is crucial to accurately calculate and report imputed income to ensure that they comply with tax laws.
How Imputed Income is Calculated:
The amount that is imputed is usually determined by the fair market value (FMV) for the benefits provided. The FMV is what the employee would be required to pay if they had to buy the benefit on their own. Employers typically employ IRS guidelines to calculate the value of these benefits. For instance, personal use of a company-owned car can be determined using the IRS’s mileage guidelines.
Reporting and Taxation:
Imputed income is recorded on the employee’s W-2 form, typically in Box 1, which lists the total tax-deductible wages. This amount is then added to the employee’s gross income, and tax is taken out in accordance with the amount.
The employee is required to report the income that is imputed when they file their tax return each year, the same way as they would when they file their regular earnings.
Impact on Payroll and Benefits:
Employers need to include imputed earnings within their payroll calculations to ensure tax withholding accuracy. This can also affect employees’ take-home pay because the tax-deductible income can raise their tax burden. Furthermore, the addition of imputed income may impact an employee’s eligibility for certain tax deductions or credits.
Also, See: Bonus Pay
