What is Imputed Income on a Pay Stub? Definition and Examples
December 13, 2022
Nowadays, employers need to offer various benefits if they want to recruit and retain employees.
The value of these benefits is known as imputed income, and employees need to pay taxes on their value and report it to the IRS by filling out W2-Forms and pay stubs.
But how do you report imputed income on a pay stub? Although it might seem difficult at first, don’t worry—we’ve got your back! Keep reading to find all the answers you need.
- Imputed income represents the benefits that an employee receives that aren’t part of their net pay.
- The most common examples of imputed income include employee discounts, personal use of company cars or cell phones, educational aid, etc.
- Fringe benefits are the benefits that are used to compensate employees beyond their regular wages and can be taxable or non-taxable.
- Some common fringe benefits are gym memberships, de minimis benefits, housing allowance, moving expenses, etc.
- To report imputed income, you need to:
- Identify which benefits are taxable
- Determine the fair market value of benefits
- Fill in the W-2 form and pay stubs
What is Imputed Income?
Simply put, "imputed income'' refers to the benefits an employee receives that aren’t part of their wages or salary. It’s the cash equivalent value of an employee’s non-cash benefits. This income is added to the employee’s gross wage, but it isn’t included in their net pay.
The best way to understand imputed income is through an example. For instance, if your employee completes a project before the deadline and you award them with a $50 gift card, that is considered an imputed income benefit.
Most importantly, as an employer or a business owner, you must report your employees’ imputed income on W-2 forms, as it’s taxable. Generally, both you and your employees need to pay FICA tax, which includes a 1.45% Medicare tax and a 6.2% Social Security tax on earnings.
Lastly, imputed income benefits can be given to employees in the US as fringe benefits, which we’ll go over shortly.
What Are Fringe Benefits?
Now, let’s explain fringe benefits because you’ll need to identify them when reporting imputed income for your employees.
As you’ll notice, imputed income and fringe benefits overlap. The biggest difference between the two is that the former is legally required, whereas the latter isn’t and is handed out at the discretion of the business owner.
In layman’s terms, fringe benefits are used to compensate employees beyond their regular wages. For example, they might include stock options, cell phones, gym memberships, snacks, meals, etc.
Most of the time, fringe benefits are promised in job ads to attract new employees and job hunters. They are an easy way to motivate someone to work extra, but keep in mind that fringe benefits can be both taxable and non-taxable.
Taxable and Non-taxable Fringe Benefits
Generally, the majority of fringe benefits come in the form of a service or a product instead of a cash payment. This makes them taxed based on their cash-value equivalent.
The most common taxable fringe benefits are:
- Gym memberships
- De minimis benefits
- Employer-provided cell phone for non-business use
- Employer-provided vehicle or car lease
- Housing allowance and moving expenses
Still, there are exemptions for this, as some fringe benefits are non-taxable—according to the IRS—and deducted on a pretax basis. They are reported on the annual tax return and include benefits such as:
- Achievement awards of up to $1,600
- Disability insurance
- Dependant care of up to $5,000 per year
- Medical insurance plans, such as health, vision, and dental care
- Lodging and meals on business premises
- Retirement planning services
- Qualified employee discounts and transportation benefits
Examples of Imputed Income
Whether you’re an employer or an employee, you need to have a crystal-clear picture of what is considered imputed income. Here are some of the most common examples of imputed income you can see:
- Employee discounts
- Awards and prizes
- Employer gifts, such as cash and gift cards
- Personal use of a company’s or employer’s car
- Non-deductible moving expense reimbursements
- Educational assistance and reduction of tuition
- Any use of an employer’s issued cell phone
- Health insurance for non-dependents (e.g., a domestic partner)
- Employee deduction assistance over the excluded amount
- Adoption assistance that exceeds the tax-free maximum
- Group-term life insurance that exceeds more than $50,000
- Employee’s income from exercising nonstatutory stock options
- Employee’s taxable income from the issuance of restricted stock
- Meals and lodging, except during tax-deductible business travel
- Travel expenses not related to business (e.g., paying for an employee’s vacation)
- Care assistance for an employee’s dependence that exceeds the tax-free maximum
- Gym memberships and other fitness benefits, such as wellness program incentive
What is Excluded From Imputed Income?
Benefits that are not counted as imputed income are called “de minimis benefits." The IRS finds these benefits impractical and unnecessary to keep track of, as they hold little value and are unusual and not frequent.
According to the IRS, anything with a value less than $100 is excluded from imputed income and is considered a de minimis benefit.
Some of the exemptions from imputed income include:
- Office snacks
- Holiday gifts
- Employee use of photocopy machines
- Tickets for entertainment events
- Transportation expenses for overtime work
- Group-term life insurance for dependents with a face value of up to $2,000
- Use of a cell phone provided by an employer for business purposes
- Gifts such as books, flowers, or fruits provided under special circumstances (e.g., International Women’s Day)
How to Report Imputed Income for Employees
As previously mentioned, employees are required by the IRS to report imputed income on W-2 forms every year. The deadline for this is usually January 31st, and here’s how you can do it.
#1. Identify Which Benefits Are Taxable
The first step requires you to identify which fringe benefits are taxable, as they are the ones that will end up on the W-2 form. For example, if you are giving an employee $2,000 in education assistance per year and, let’s say, $500 for a gym membership, you will have to list both of these benefits.
#2. Determine the Fair Market Value of Benefits
As some fringe benefits come in the form of services or products, you will need to determine their fair market value or cost. "Fair market value" is the price at which the product or service would sell on the open market.
For example, if you are providing an employee with a company car, you need to determine how much money the employee would have to pay to obtain the vehicle on their own. You should also consult IRS Publication 15-B for more rules on car fair market valuation.
Note that you can find other important information on taxation and reporting of imputed income in Publication 15-B.
#4. Fill in the W-2 Form
Once you’ve calculated all fringe benefits for your employee, you need to report them on the W-2 form. The easiest way to fill in this form is to use an online generator, as you’ll only have to enter the required information and download the document.
Usually, imputed income is listed in boxes 12a through 12d.
How To Report Imputed Income on Pay Stubs
Other than reporting imputed income annually on the W-2 form, you also need to display imputed income every month on pay stubs. This is an important legal document that contains all the details regarding your employee’s pay (e.g., work hours, gross wages, net pay, etc.).
Keep in mind that all employers are required to provide their employees with a pay stub and keep it for at least 4 years, according to the IRS.
The easiest way to make pay stubs and report imputed income on them is to fill in an online template. The process itself takes only a couple of minutes, after which you can download the document right away!
Imputed Income and Pay Stubs FAQ
#1. Why do I have imputed income on my pay stub?
All employers are required by law to report imputed income annually on W-2 forms and monthly on pay stubs. This value is tracked, reported to the IRS, and subject to:
- Medicare (FICA) Tax
- Social Security Tax
- Federal Unemployment Tax (FUTA)
#2. Is imputed income an earning or deduction?
Imputed income is treated as income because employers are required to include it in their W-2 forms for tax purposes.
#3. How much do you get taxed on imputed income?
As of 2022, for imputed income, you are taxed 6.2% for Social Security and 1.45% for Medicare.
#4. What are some examples of imputed income?
Some examples of imputed income include employee discounts, awards, prizes, employer gifts (e.g., gift cards and cash), personal use of company cars or cell phones, health insurance for non-dependants, etc.
As an employer, you need to understand and take care of imputed income if you want to avoid a legal headache.
If you want to report imputed income on W-2 forms and pay stubs, we can generate both of these documents for you affordably and hassle-free! Feel free to contact us, and our team of experts will get back to you as soon as possible, helping you with all things tax-related!