As an employer, you are likely familiar with reporting regular wages and taxes withheld on Form W-2. But, are you aware that you must report other amounts or payment types, such as imputed income? Learn what is imputed income, types, and how to report imputed income.
What is imputed income?
Imputed income is adding value to cash or non-cash employee compensation to accurately withhold employment and income taxes. Basically, imputed income is the value of any benefits or services provided to an employee. And, it is the cash or non-cash compensation taken into consideration to accurately reflect an individual’s taxable income.
Imputed income typically includes fringe benefits. Employers must add imputed income to an employee’s gross wages to accurately withhold employment taxes. Do not include imputed income in an employee’s net pay.
Because employers treat imputed wages as income, you must tax imputed income unless an employee is exempt.
Imputed income is especially common in determining child or spousal support in family law matters.
Types of imputed income
As an employer, you must be aware of what can be considered imputed income. Types of imputed income include:
- Care assistance for dependents exceeding the tax-free amount
- Group-term life insurance exceeding more than $50,000
- Adoption assistance exceeding the tax-free amount
- Personal use of employer car
- Employee education assistance over the excluded amount
- Non-deductible moving expense reimbursements
- Fitness incentives or gym memberships
- Employee discounts
Using imputed income to determine child support
As mentioned, you can use imputed income in situations involving child support. Essentially, imputed income can determine how much an individual pays for child support. Using imputed income for child support differs from its regular use (e.g., fringe benefits).
In child custody cases, a judge may use imputed income to determine how much an individual can pay.
For example, say an individual is unemployed and can’t afford to pay a certain amount for child support. The court may assign a smaller child support payment amount based on imputed income.
Employee benefits may also be extended to domestic partners as imputed income (e.g., health insurance). You must report these benefits on Form W-2.
Establishing imputed income and child support standards prevents individuals from staying unemployed or working a low-paying job on purpose to lessen child support burdens. These standards can vary by state.
Imputed income and paychecks
You must withhold Social Security and Medicare taxes (FICA) from employees’ imputed income.
Typically, you do not have to withhold any federal taxes from imputed earnings. But in some cases, imputed income is not entirely exempt from federal income tax withholding.
Employees can opt to withhold federal income tax from imputed pay. Or, they can pay the amount due for federal income tax when filing their income tax return.
Let employees know that tax penalties may apply if they do not withhold enough federal income tax on imputed income.
Contact the IRS directly if you have any questions regarding imputed income tax withholding requirements and exemptions.
Reporting imputed income
To accurately show an employee’s taxable wage-related income, you must include imputed income on Form W-2. Report imputed income on Form W-2 for each applicable employee. Record imputed income on Form W-2 in Box 12 using Code C. Also, include the amount for imputed income in Boxes 1, 3, and 5.
Remember that imputed income is typically not subject to federal income tax withholding. However, imputed income is subject to Social Security tax and Medicare tax withholding.
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This article has been updated from its original publication date of May 9, 2012.
This is not intended as legal advice; for more information, please click here.