Imputed Income
Summary Definition: The monetary value of taxable, non-cash benefits or perks an employee receives from their employer.
What is Imputed Income?
Imputed income, also known as imputed earnings, is the value of any taxable compensation given to employees by companies in the form of non-cash benefits (a.k.a., fringe benefits). Employee benefits add considerable value to a standard salary package, so the IRS must account for them.
Common examples of imputed income include:
- Gift cards
- Cost of non-work-related training (e.g., financial wellness programs)
- Personal use of a company car
- Employee discounts
- Gym memberships
- Health insurance for non-dependents
Key Takeaways
- Imputed income is the value of any substantial, non-cash benefits an employee receives as part of their compensation package.
- Imputed income is subject to employment tax withholding, and employers must declare it on W-2 forms.
- Benefits worth less than $100 are considered de minimis and don’t count towards an employee’s income taxes.
What is Excluded from Imputed Income?
Imputed earnings don’t include work-related benefits that fall into a different category, such as a floating holiday or reimbursement for educational expenses up to $5,250.
Many companies also reward employees with small (i.e., less than $100 in value) or flexible benefits like those listed below. Due to that smaller value, the IRS instead considers them de minimis benefits, which aren’t considered taxable income.
- Holiday presents
- Fruit baskets or other snacks (e.g., coffee and doughnuts)
- Occasional tickets for entertainment events
- Small items of branded merchandise (e.g., shirts or keychains)
- Personal use of a company cell phone
To confirm what does and doesn’t qualify as imputed income, consult the IRS’s Fringe Benefit Guide.
Imputed Income Tax
Most imputed income is taxable and, depending on the type and amount, can increase an employee's gross taxable income for state and federal tax returns. Therefore, companies must understand the difference between taxable and nontaxable fringe benefits.
How is Imputed Income Taxed?
Employees must pay the same taxes on their imputed income as the rest of their wages.
This includes standard FICA taxes for Medicare and Social Security, federal income tax, and any applicable state and local income taxes. However, if the imputed income exceeds $1 million, a higher federal income tax rate is used.
The total amount of imputed income an employee received is included in the total adjusted gross income amount on the employee’s W-2 form.
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