What is imputed income?
If you are drawing a salary that includes various benefits that are non-monetary in nature, then you may have to do some additional work while calculating your tax liabilities. These non-monetary benefits that you draw as a part of your package are known as fringe benefits or imputed income. Here are certain things you need to know about imputed income and what are the tax implications of the same.
As already mentioned, imputed income or fringe benefits are parts of your pay package that aren’t paid to you in the form of money and their value isn’t included in the calculations of your paycheck. However, you should note that you need to pay taxes on the imputed income to the IRS as well as to the state in which you are residing.
What are the different types of imputed income?
There are different ways in which you can be earning imputed income. Some common ways include if you avail a free gym membership as a part of your salary or if you are getting adoption assistance or educational assistance then you are earning imputed income. Even if you are getting benefits in the form of achievement awards or if you are claiming employee discounts or tuition reductions then it is also covered as a part of imputed income. Using an official car for personal use or claiming care assistance is also classified as imputed income. In addition, stock options, retirement planning or group-term life insurance (GTL) that has a value of more than $50,000 are also termed as imputed income.
What is the process of reporting imputed income?
It is mandatory for your employer to report your imputed income as an employee on your W-2 form. While the amount of federal income tax that you are paying may be or may not be increased due to your imputed income, however, it may increase the amount of your Social Security and Medicare tax. It should be noted that if your imputed income is taxed as a federal income, then you as an employee can choose if you want the taxable amount to be withheld each paycheck or pay the entire amount at once while filing your income taxes.
How to calculate imputed income?
There are different types of imputed income and each one has got its own tax code. Also, the calculation for each type of imputed income is different. Hence, you should ensure that you have a complete understanding of each type of tax code before you begin calculating the imputed income for that particular tax code. Also, you should note that many benefits have a tax-free threshold, examples being group-term life insurance and daycare assistance.
The next step is to calculate the value of the imputed income in the form of cash and deduct the tax-free amount from the imputed income. This difference is the taxable amount and this figure must be reported on the income statement.
In the last step, you need to multiply the taxable amount by the corresponding tax rate for your particular tax bracket. The resulting amount is the cost of the imputed income.
Should professionals be hired to calculate imputed income?
As an employer, you shouldn’t take a risk on calculating the imputed income for various employees, especially if the amount is considerable and the imputed income involved is diverse in nature. In case you fail to pay the correct amount of imputed income, you are liable to a 20% penalty from the IRS. To avoid such situations, it is best to consult professionals like a Certified Public Accountant, or a CPA to calculate such kind of taxes. CPAs use a payroll software to calculate various types of taxes as a tax on imputed income. Professional help in calculating imputed income may keep you safe from IRS penalties.