Imputed income is defined as the cash value of a benefit that is not part of your employees’ salaries. Even though the benefit — like a gym membership — isn’t received in cash, it’s still taxable based on its cash value. Imputed income was developed to ensure that workers don’t reduce the tax that would be due were cash given instead. It is the employer’s responsibility to calculate and report imputed income. Imputed income can increase employees’ taxable income and eventual tax liability.
You must withhold tax and report imputed income as you would for any other type of income paid to employees using IRS Form W-2. Because imputed income is taxed like earned income, it is subject to FICA. Qualifying benefits are taxed at employees’ normal federal income tax rates, unless the benefit value exceeds $1 million; then, the tax rate is 37%.
Benefits with and without imputed income
Among the benefits with imputed income are:
- Use of a company/employer car
- Free gym membership
- Dependent care assistance exceeding $5,000
- Group term life insurance exceeding $50,000
- Moving expenses (van rental, relocation costs, real estate agent fees, etc.) related to employment
- Higher education tuition assistance exceeding $5,250
- Adoption assistance exceeding $16,810 per child (in 2024)
- Cash and gift cards
- Health insurance for nondependents, such as a domestic partner
- Goods and/or services from partner companies
- Forgiveness for student loan debt
- Qualifying achievement awards exceeding $1,600
The following benefits are excluded from imputed income:
- Health insurance for dependents
- Health savings accounts
- Dependent care assistance under $5,000
- Group term life insurance under $50,000
- Education assistance under $5,250
- Small or occasional employer gifts such as movie tickets, birthday cakes, company T-shirts, employee snacks or meals, and tangible gifts with a low fair-market value
It is important to let your employees know in advance which benefits will be included in their taxable income. This helps them understand what will be on their W-2 and how to prepare their taxes.
While many examples of imputed income are straightforward, some are excluded under some circumstances. For example, a gym membership doesn’t count as imputed income if the gym is on work property and available only to employees. Similarly, graduate-level educational assistance for employees who teach or conduct professional research is excluded. A third example is that moving expenses for U.S. armed services members who move following a military order are excluded from the imputed income rules. In other words, imputed income can be nuanced, so consulting with an income tax professional would be a wise decision. Careful attention to the rules can help you and your workers avoid tax penalties.
We welcome the opportunity to put our accounting expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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