What is imputed income?

An employee’s salary isn’t the only form of income they receive. Imputed income may be provided to employees who work at your small business. If so, it is important to recognize it to avoid tax penalties for your company and your employees. To ensure you are not missing imputed income, consult with a tax professional to learn or verify what counts as imputable income in your unique circumstances and how to report it.

In this guide, we will overview the definition of imputed income and help you learn how to recognize and report it.

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What is imputed income?

The term “imputed income” typically applies to noncash benefits that employees, contractors or a business partner receives from a business. It also applies to noncash benefits provided to employees’ spouses or dependents for business services provided by the employee.

The imputed income someone receives is based on the value of qualifying fringe benefits, or the tangible and nonmonetary benefits that the business provides as compensation. The IRS does exclude some fringe benefits from imputed income if, for example, the value of the benefit does not exceed a certain amount. It is important to know these limitations and exclusions so you can correctly estimate the value of and report imputed income.

Common imputed income examples

Though some exceptions or limitations may apply, some common examples of imputed income include:

• Group term life insurance: Coverage over $50,000 your business provides as part of a compensation package for an employee is considered taxable imputed income.
• Tickets to events: The IRS counts regularly provided tickets or season passes to sporting or entertainment events as taxable fringe benefits.
• Use of company-owned property: When employees use the company car or home for personal reasons, it is often taxed as an imputed benefit.
• Gym membership: A gym membership paid for by an employer for employees to use counts as imputed income. However, if the facility is located on the company premises and is only available to employees, their spouses and their dependents, the use of it does not count as imputed income.
• Reimbursement for commuting expenses: Whether it’s fees for toll roads or reimbursement for riding your bicycle to work, the value will count as imputed income if an employer covers it. However, vouchers for public transportation do not count as long as they don’t exceed $21 per month.
• Reimbursement for moving expenses: Any monetary and nonmonetary benefits, such as the use of company vehicles to move from one personal residence to another, count as taxable imputed income. However, moving expenses are not taxed for military members of the U.S. Armed Forces on active duty who move in response to a permanent military order to change stations.
• Education assistance: In most cases, any assistance an employer provides that’s over $5,250 per year is imputed income. However, job-related education does not count as imputed income.

What is excluded from imputed income?

There are some fringe benefits stipulated by the IRS that are excluded from taxable imputed income. One of these include de minimis, or minimal benefits. These benefits are essentially so low or insignificant in value that there’s almost no point in tracking or reporting them. Though it depends on the circumstances and context in which an employer provides these benefits, some examples of de minimis fringe benefits include:

• Holiday gifts.
• Meals or transportation expenses if an employee is working overtime.
• Flowers, or small gifts provided for special circumstances (like a birthday or bereavement).
• Occasional snacks.
• Occasional tickets to entertainment events.
• Group term life insurance for a worker’s spouse or dependent under $2,000.
• The use of a company cell phone for personal circumstances on occasion.

Other fringe benefits that are completely excluded from taxable imputable income include:

• Accidental or health insurance benefits.
• Health savings accounts (HSA) as a result of an employee signing up for a high deductible health plan (HDHP).
• Meals provided at the employer’s place of business.
• Retirement planning services.

Other types of fringe benefits may not count as taxable imputed income, but this exemption may only be granted if the value of the benefit is limited to a certain value or monetary amount. These include:

• Adoption assistance. This benefit is exempt from income taxes but not from Medicare and federal unemployment taxes.
• Awards, provided their value does not exceed $1,600.
• Dependent care assistance of up to $5,000.
• Educational assistance of up to $5,250 annually.
• Reduction in tuition, provided the course of study is at the undergraduate level (or at the graduate level if the student performs teaching or research services for the business).

Special cases of imputed income

In some cases — such as for employees who work in the U.S. Armed Forces or farming and agricultural industries — there are exemptions of taxable imputed income that are substantially different from the norm.

U.S. Armed Forces

An active member of the U.S. Armed Forces who is required to move because of a military order may be reimbursed for moving expenses. In order for this fringe benefit to not count as imputable income, the military order has to be a permanent change in station and the amount of moving expenses must be reasonable in nature.

For instance, reasonable expenses are ones that the U.S. Armed Forces members can deduct if not reimbursed. These include the expense to move household goods and personal effects and travel expenses necessary for the move, such as the cost of gas with a standard mileage rate of $0.22 per mile.

Farms and agriculture

There are several farming and agricultural fringe benefits that qualify as exceptions to taxable imputed income, two of the main ones being housing expenses and use of a company vehicle. For instance, if an employer were to provide farm workers food and housing for the employer’s convenience, the provided lodging and meals may be exempt from taxation if acceptance of housing is a condition of employment, meals are furnished on the business premises and the residence is located on business premises.

The use of vehicles for personal purposes may count as exempt from imputable income taxation if it’s been modified or is inherently designed so that it’s mostly used for work purposes. An example provided by the IRS would be a van that weighs 14,000 pounds or less, has special decals or advertising concerning the farm or agriculture business and only seats the driver and one other passenger. Tractors and special-purpose farm vehicles — such as refrigerated trucks — are also exempt.

Imputed income’s effect on taxes

As we’ve demonstrated, many forms of imputed income are taxable and, therefore, workers need to pay income taxes on them. Employers must report all taxable imputed income each year to the IRS and, often, state governments. If the income results in a higher tax bracket, then the tax liability may be higher.

“Frequently, there won’t be any withholding for imputed income,” says Aristotle Makris, CPA, CFP, tax advisor at The Planning Center in Chicago. “I’ve had clients where this was put in their W-2 with no federal withholding, and there was a pretty hefty tax bill as a result.” 

Markis says that the employee can request to have additional taxes withheld for the imputed income, either at a specific amount or a percentage based on their tax bracket.

“Withholding taxes is in the best interest of the employee as it avoids a surprise tax bill, but it’s often a challenge to get the tax withholdings just right since there are so many variables for every individual,” he says.

To simplify the calculation of tax withholding on the amount of taxable fringe benefits, the IRS offers two options:

• You can add the value of the fringe benefit to the employees’ regular wages for that payroll period and withhold taxes on the total amount as normal.
• You can withhold on the value of the fringe benefit a flat 22% rate — the rate that is normally applied to supplemental wages.

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Via OnPay’s website

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Learn More

Via SurePayroll’s website

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$29.99 per month plus $5 per employee

Direct deposit

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Learn More

Via Gusto’s website

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Starting at $40 plus $6 per month per employee

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Via Rippling’s website

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How is imputed income reported?

Taxable imputed income is reported on the following tax reporting forms:

• For employees: form W-2.
• For independent contractors: form 1099-NEC.
• For a partner in the company: form 1065 schedule K-1.

The amount reported is based on the value of the nonmonetary benefit given and is calculated based on a reasonable estimate. For example, if the value of transportation given to an employee is reasonably estimated at $500, then that amount should be reported on the employee’s W-2, a partner’s schedule K-1 or an independent contractor’s 1099-NEC. Such values must be determined by January 31 of the following year in which the benefit was provided to the employee.