What is imputed income?

So, what is imputed income? If you give your employees noncash taxable compensation, the value of that compensation is considered imputed income for the employee. Imputed income is included in the employee’s gross pay, rather than their net earnings, because the employee already received the benefit in some form.

Imputed earnings are separate from the employee’s salary. However, because fringe benefits have a value, they need to be reported to the IRS, Social Security and other appropriate tax agencies.

Imputed income is also commonly used by family courts to help determine child support and spousal support (alimony) amounts.

Examples of imputed income

Most imputed income must be taxed. Examples of imputed earnings include:

• Memberships for gyms, wellness programs, health clubs and country clubs
• Personal use of a company or employer-provided vehicle
• Gift cards, awards and prizes, regardless of the dollar amount
• Group-term life insurance valued at more than $50,000
• Educational financial assistance and tuition reimbursement exceeding $5,250
• Dependent care assistance exceeding $5,000
• Adoption assistance exceeding the tax-free amount
• Moving expense reimbursements that are nondeductible

Examples of nontaxable fringe benefits

Benefits that the IRS considers nontaxable are called de minimis (minimal) benefits. According to the IRS, such benefits have so little monetary value that accounting for them would be administratively impracticable and unreasonable. These can include:

• Occasional tickets for sporting events and theaters
• Picnics and parties for employees and their guests
• Birthday and holiday gifts with a low market value (except for cash)
• Occasional personal use of an employer-provided cell phone
• Meals and meal money provided when employees work overtime
• Occasional local transportation fares for employees working overtime
• Public transportation passes that don’t exceed a discount of $21 per month
• Company logo-branded items of low value, such as pens, shirts, keychains and water bottles
• Occasional personal use of the company copying machine
• Health savings accounts
• Group-term life insurance for the employee’s spouse or dependent, not exceeding a face amount of $2,000

De minimis benefits should have a value of less than $100. Benefits valued at $100 or more are not exempt and must be reported on your employee’s tax return.

Valuation of fringe benefits

The IRS has several rules that can help employers determine the value of fringe benefits.

General valuation rule

Typically, you’ll use the general valuation rule to calculate the value of most fringe benefits. Under this rule, the benefit’s value is equal to its current fair market value (FMV). The FMV is the amount your employee would have to pay a third party to buy or lease the benefit.

For employer-provided vehicles, the FMV is the amount an employee would pay a third party to lease the same or a similar vehicle in the geographic area where the vehicle is primarily used.

Cents-per-mile rule

Use this rule to determine the value of a vehicle provided to an employee for personal use. To calculate the value, multiply the total miles driven for personal purposes by the IRS standard mileage rate (56 cents per mile for 2021).

You’re allowed to use this rule if you expect the vehicle to be regularly used for your business throughout the calendar year.

Commuting rule

The commuting rule is another way to determine the value of an employer-provided vehicle. Multiply the number of one-way commutes (from work to home or home to work) by $1.50 per employee who uses the vehicle. This rule can be used if:

• You provide the vehicle for employees to use for your business and require employees to commute using the vehicle. The IRS considers this requirement met if at least three employees use the vehicle to commute to and from work in an employer-sponsored commuting pool.
• Employees don’t use the vehicle for personal purposes, except for de minimis personal use, such as a brief stop for a personal errand while commuting between the employee’s home and place of work.
• You have a written policy forbidding employees from using the vehicle for personal purposes (de minimis usage excluded).
• The employee can’t be considered a control employee, which is an employee who’s paid $235,000 or more, and they can’t own 1% or more in capital, profits or equity of your business.

Lease value rule

This rule is used to determine a vehicle’s value based on its annual lease value. To calculate, reduce the lease value by the amount that’s excluded from the employee’s earnings as a working condition benefit (the amount that would be considered an allowable business deduction for an employee if they paid for usage of the vehicle).

Unsafe conditions commuting rule

Transportation provided to employees solely because of unsafe conditions is valued at $1.50 per one-way commute. You can use this rule if:

1. The employee doesn’t use the transportation for personal purposes, and you have a written policy excluding personal usage.
2. The employee would typically use public transportation or walk to work.

Withholding taxes from imputed earnings

As an employer, you’ll need to withhold Medicare (FICA) and Social Security taxes from your employee’s imputed income, but you’re usually not required to withhold federal taxes from imputed earnings.

Your employees can pay the amount due on imputed taxes when filing their tax return or opt to withhold federal income tax from their imputed earnings. If employees don’t withhold enough federal income tax on imputed earnings, let them know that tax penalties can apply.

For more information about employees and imputed earning, see the IRS Employer’s Tax Guide to Fringe Benefits.