Introduction

Have you noticed that your taxable income has gone up without receiving additional money in your paycheck? The answer may be in the imputed income you have received. Imputed income is the taxable value of the benefits your employer provides you, but the benefits are not cash. Because of this fact, you do not receive the physical cash to tax, but it does add to your tax liability and reduce your total take home pay.

Imputed income is made up of fringe benefits that are provided by your employer, such as group term life insurance; personal use of a company vehicle; and health insurance for domestic partners. Even though you do not get received any additional income, you are still taxed on the fair market value of the benefit you received in the form of an imputed income. This article outlines all of the basics about imputed income, how to calculate it and the affect that it will have on your paycheck.

What is Imputed Income?

Imputed income is any benefit you receive from your employer that has a taxable value, but you do not receive a physical payment for it. The IRS considers imputed income to be a source of income for tax purposes. The result is an increase in your gross taxable income, which allows your employer to withhold more taxes from your paycheck.

Major Points:

Examples of imputed earnings are benefits provided via building block insurance (e.g., group-term life) or a company vehicle that you use for personal purposes.

You won’t receive money as a result of imputed income; however, the amount will increase the calculated wage you receive for tax purposes.

In addition to being included in your taxable income as part of the total amount received, you will be paying federal, FICA (Social Security), and Medicare taxes based on the value of the imputed income.

What Is Imputed Income?

Imputed income is not cash; it is the total value of numerous non-cash benefits that will be taxable under Federal Law and would be treated as taxable wages under State and Local Laws.

Imputed income will add to your taxable income, this is why your employer will deduct more money from your paycheck for both the Federal and State tax you will owe so that you comply with your tax reporting requirements for the total benefits received.

Additional Examples Of What constitutes as Imputed Income:

Group-Term Life Insurance — the first $50,000 in coverage will not be taxed; however, any coverage above this amount will be considered as imputed income and therefore will incur taxation regardless of method of distribution (payroll, 1099, or otherwise).

Qualified Use of Company Vehicles — Per IRS guidelines, when you receive a personal benefit from a company vehicle (i.e. using it for your own purposes), this is classified as taxable imputed income, (usually referred to by the IRS as “Sole Use”).

Health Insurance of Domestic Partners — imputed income will be the value of health insurance provided to a spouse or domestic partner that may not otherwise qualify as a dependent under IRS guidelines.

Imputed Income: How to Determine its Value

The IRS has a variety of guidelines to help you calculate the value of these kinds of benefits, and most businesses will automate this process through the use of payroll software. Depending on the type of benefit, like group-term life insurance, an employer may have to refer to IRS tables for the calculation of the imputed value of that benefit.

How it will Affect Your Taxes

Imputed income increases your taxable income. As a result of this increase, you may end up with a bigger tax bill and/or less of a refund when you prepare your taxes. You will see this increase on your W-2, and you may notice your take home pay is slightly less than before.

Conclusion

It is important to know how to understand imputed income so you can accurately manage your taxes and family financial situations. Even though you do not receive cash for these benefits, they are considered taxable and will also affect your withholding amounts. It is very important to look at your benefits and talk to your HR department if you have questions about your imputed income.