Imputed Income Definition

Term Definition
IRS uses the term ‘imputed income’ to refer to the value of a cash or non-cash employee benefit that must be treated as income to calculate federal taxes.

Extended Definition
Employees’ earned income – cash or non-cash compensation – is subject to income taxes and employment taxes (Medicare and Social Security), and not applicable on certain kinds of earned income, like health insurance benefits. The value of the benefits received can sometimes be more than the tax deductions allowed on them. The difference between the two amounts is the imputed income. Employers are required to report employees’ imputed income on Form W-2. Federal rules on employee income tax withholding are not applicable to imputed income but it is subject to FICA (Social Security and Medicare) or employment tax withholding.

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A Closer Look at Imputed Income