Imputed income refers to the value of non-cash benefits that an employee receives. Understanding the ins and outs of imputed income is essential because this form of compensation can directly impact your taxable income in a given year. For instance, if you’re an employee who takes home a company, the fair market value of that car’s usage becomes your imputed income and increases your overall tax liability. A financial advisor can help you plan for the tax implications of different sources of income, including imputed income.
How Imputed Income Works
The concept of imputed income was developed to ensure that those receiving non-cash benefits don’t evade taxes that would be due if they received cash instead. However, it’s the employer’s responsibility to calculate and report an employee’s imputed income to the IRS.
For instance, let’s consider the example of an employee using a company car for personal purposes. The value of the personal use of the car – which is based on IRS guidelines – is considered imputed income and must be included in the employee’s taxable income.
What Benefits Are Taxed as Imputed Income?
Personal use of a company car isn’t the only form of imputed income. The following benefits are also seen as imputed income because they provide a monetary value to the employee without the exchange of cash. As a result, they fall under the Internal Revenue Code’s broad definition of “all income from whatever source derived.”
- Group-term life insurance exceeding $50,000
- Educational assistance of more than $5,250
- Dependent care assistance exceeding $5,000
- Fitness benefits, including gym memberships
- Personal use of a vehicle
- Employer-provided housing
- Health insurance for non-dependents, including domestic partners
- Adoption assistance in excess of the annually adjusted amount
Examples of Imputed Income
Consider an employee who receives free housing from their employer. In this case, the fair market value of the housing is considered imputed income. Suppose the apartment provided to the employee would rent for $12,000 a year on the open market. This amount will be added to the employee’s gross income for the year, raising their taxable income.
Or perhaps a company pays $10,000 worth of tuition for an employee to advance her career. While the IRS exempts up to $5,250 from taxes, the excess will get reported as imputed income. As a result, the employee will have an extra $4,750 in income she’ll potentially owe taxes on.
Exclusions From Imputed Income
Not all non-cash benefits are considered imputed income, though. Certain benefits like health insurance and specific types of life insurance are excluded.
Here are some common non-cash benefits that are not considered imputed income:
- Health insurance for dependents
- Education assistance of less than $5,250
- Dependent care assistance of less than $5,000
- Group term life insurance of less than $50,000
- Adoption assistance below the annually adjusted amount
De minimis benefits, which include small-value items like free coffee, doughnuts or tickets to sporting events, are also not considered imputed income. These exclusions exist due to practicality considerations related to tracking such small-value items for taxation.
How to Report Imputed Income
Luckily, if you receive non-cash benefits that qualify as imputed income, it’s not your responsibility to report it. Instead, it’s your employer that’s responsible for reporting this income to the IRS. When you receive your W2, you’ll see this additional income listed in Box 12 using Code C. Employers should include the amount of imputed income the employee received in Boxes 1, 3, and 5.
Imputed income refers to taxable non-cash benefits or income that employees get outside of normal taxable wages. These benefits may include the personal use of a company car, employer-paid housing, tuition assistance, gym memberships and more. It’s your employer’s responsibility to report imputed income on your W2 but you should plan ahead since these benefits can increase your taxable income and eventual tax liability.
Tax Strategy Tips
- A financial advisor may be able to help you organize your finances in a way that lowers your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you anticipate being in a higher tax bracket in retirement, consider converting at least a portion of your IRA or 401(k) into a Roth IRA. You’ll be required to pay taxes on your money for the year in which you complete the conversion, but the money will grow tax-free from then on. As a result, your nest egg won’t be subject to the higher tax rates you anticipate facing in retirement.
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