If you’ve landed a new job with a variety of benefits, you may also have additional responsibilities with your income tax. Called imputed income, there are a few things you need to know about your fringe benefits.
Imputed income, or fringe benefits, is when you’re compensated with something that’s not money. The value isn’t included as part of your paycheck, but you do need to pay taxes on the imputed earnings to the IRS as well as your state.
Examples of Imputed Income
If you’re confused about whether or not you’ve received imputed income, here are a few common examples:
- Reimbursement for job-related expenses, such as moving costs
- Free gym membership
- Adoption assistance
- Educational assistance
- Achievement awards
- Employee discounts
- Tuition Reductions
- Employer car that is also used for personal use
- Care assistance
- Stock options
- Retirement planning
- Group-term life insurance (GTL) that is more than $50,000
How do you report imputed income?
As an employee, it’s your boss’s job to report imputable income on your W-2 form.
Employers report imputed income on each employee’s W-2 form. Box 12, code C are filled out but the full imputed income amount is also recorded on boxes 1, 3, and 5.
Imputed income does not usually necessitate more federal income tax, but it may for Social Security and Medicare tax.
If the imputed income is taxable federal income, employees can choose whether or not to have the amount withheld each paycheck or whether to pay the amount when filing their income taxes.
Should employers hire tax professionals?
It depends on the amount and diversity of the imputed income. If you offer a wide variety of fringe benefits to your employees, and each employee receives a different array of benefits, then a certified CPA might very well be worth your time and money. Failure to pay the appropriate amount can result in a 20% penalty from the IRS.
How is imputed income calculated?
Each imputed income has its own tax code, and so the calculation for each is different. Therefore, make sure you read and understand each tax code before you begin. Many benefits have a tax-free amount, such as gtl (group-term life insurance) and daycare assistance.
Next, calculate the cash value of the imputed income and subtract the tax-free amount from the imputed income. The difference is the taxable amount and must be reported on the income statement.
Lastly, multiply the taxable amount by whatever the tax rate is for your particular tax bracket. The product, or answer, is the cost of the imputed income.
How does imputed income affect paychecks?
If you look closely at your paystub, you may see a line for imputed income. Imputed income does not affect your gross pay but it will affect your taxable earnings and net pay. This means you may receive a little less per paycheck because you’re paying more in Social Security and Medicare taxes.
Is imputed income worth it?
In most cases, it absolutely is. You’re paying more taxes, yes, but if the services are something you would pay money for anyway (such as gtl), the cost of the benefits far outweigh any taxes you pay.