The imputed cost is calculated on the amount of coverage exceeding the non-taxable limit, which is generally $50,000 for the employee’s own coverage. Employers should present total compensation in a way that includes salary, wages, and the value of all benefits, both taxable and non-taxable. Transparent communication about imputed income ensures employees fully understand their compensation. Group-term life insurance coverage up to $50,000 is excluded from taxable income.
How Can I Reduce My Imputed Income Tax Liability?
Any fringe benefit provided to an employee is taxable income for that person unless the tax law specifically excludes it from taxation. Other fringe benefits are tax-free and need not be included in the employee’s compensation. While every employer has the responsibility to properly report its employees wages, each individual is ultimately responsible for correctly reporting their income to the IRS. Make sure that you report the value of any taxable fringe benefits as income on your tax return, whether or not your employer correctly includes them in W-2 wages.
Under IRS regulations, any fringe benefit valued less than $100 is a de minimis benefit. Remember, a vital aspect of these perks is that they’re infrequent benefits. So, considering how often you provide them in addition to how valuable they are is crucial to determining if you have a de minimis fringe benefit. Open, consistent communication shows employees that you’re not just offering great benefits—you’re helping them understand and manage the financial impact, too. If firms opt for the latter option (getting employees to pay first), they often rely on travel and entertainment expense management (T & E). From the IRS’s perspective, any income employees derive from T & E reimbursements is exactly the same as taxable pay and, therefore, subject to tax.
Helping employees avoid surprise tax bills
If they use the equipment exclusively at work, you can subtract the expense from their imputed income. However, if the worker splits the use of the laptop equally between work and leisure, then you can only subtract half of its value from their imputed income. For IRS purposes, “fair market value” refers fringe benefit imputed income to whatever a willing buyer would pay for an item of equal value. For instance, if you get a gym membership for your employees at $50 per month, then the fair value would be the same since that’s what other members of the public would pay, too. Employers can indulge in a few fringe benefits that won’t raise any red flags with the IRS. Called “de minimis (minimal) benefits,” these benefits are something worth so little that the IRS considers it administratively impractical to record or keep an account.
While imputed income is not part of an employee’s salary or wages, it’s usually taxable and added to an employee’s gross wages to withhold employment taxes. Commonly referred to as fringe benefits, these perks come in many forms — and are sometimes considered taxable compensation (known as “imputed income” in the eyes of the IRS). As outlined above, “fringe benefit” is a term with no precise definition and can include a wide variety of supplemental benefits for employees. Therefore, taxable fringe benefits by default are included unless otherwise provided in the plan document. Many retirement plans exclude all forms of fringe benefits from eligible plan compensation and would indicate such in the adoption agreement or the plan document.
Personal Use of a Company Car
Imputed income includes a variety of non-cash benefits that provide economic value to employees. Many fringe benefits overlap with the concept of imputed income because some of these benefits have taxable value. Common fringe benefits include health insurance, retirement plans, paid time off, stock options, company cars, and gym memberships. Unlike wages, these benefits are not guaranteed by law but are offered at the discretion of the employer.
🔍 Real-World Scenarios: Is This Benefit Taxable?
Some benefits are negligibly small (known as “de minimis”), or exist on site and can only be used by employees (for example, in-office gyms), or are incidental to the employer’s main business . You give your employees the option between receiving cash benefits or a health savings account . Their contributions to this account are taken out of their wages before taxes, lowering their taxable income and reducing their tax liability.
How should S-Corp owners track fringe benefits?
This tax treatment ensures fairness since employees receiving high-value life insurance coverage are taxed on the benefit they enjoy beyond the exempt amount. For example, the personal use of a company car is generally valued based on the fair market value of the car or by using standard mileage rates for personal use. Employers may also use the automobile lease valuation method or cents-per-mile rule, depending on the situation. In most cases, excluded de minimis benefits aren’t subject to federal income, Social Security, Medicare, FUTA, or Railroad Retirement Tax Act (RRTA) taxes. With tools like QuickBooks Payroll, you can automate imputed income tracking, apply IRS rules accurately, and generate year-end forms in just a few clicks. That means fewer errors, less stress, and more time to focus on growing your business.
For Employees: Tax Surprises to Watch Out For
The IRS provides a list of fringe benefits that are deemed imputed income, some of which might be exempt up to a certain threshold. Let’s take a closer look at the benefits that are subject to taxation and the stipulations or limits that might impact their imputed-income status. As an S-Corp owner, it’s important to understand what fringe benefits are, how they are taxed, and how to accurately track them.
Although it might seem difficult at first, don’t worry—we’ve got your back! According to a 2023 IRS compliance study, nearly 30% of businesses misreport employee benefits, risking hundreds in IRS penalties for each oversight. For personal use of a company car, employers may use methods like the annual lease value rule or mileage rates.
- However, if the worker splits the use of the laptop equally between work and leisure, then you can only subtract half of its value from their imputed income.
- For example, if you let an employee use a company car for personal trips, the value of that personal use is taxable income.
- The value of the excess coverage is calculated based on IRS tables and must be reported on the employee’s W-2 form.
This form of compensation is considered imputed income because it represents a financial benefit that the employee receives from their employer, which has a monetary value attached to it. Although the employee may not physically receive any extra money, the value of these fringe benefits is regarded as taxable income by the tax authorities. Fringe benefits should be considered imputed income when they are provided to employees by their employer for personal use or enjoyment, in addition to their regular wages or salary. Imputed income can arise in various situations, such as when an employee receives a company car for private use, employer-provided housing, or membership to a gym.
- If the housing is free or discounted, the fair market value (FMV) counts as imputed income.
- If you provide more than that, the value of the excess coverage becomes imputed income.
- While some benefits, like health coverage for a spouse, are often excludable from income under Internal Revenue Code Section 61, benefits for domestic partners typically are not.
- Employers may choose to offer a mix of taxable and non-taxable benefits to provide comprehensive compensation while managing tax impacts.
You don’t include the amount in your employees’ net income because they received the benefit in another form. Employer-paid health insurance premiums for employees, spouses, and dependents are not considered imputed income. These payments are fully excluded from taxable wages, and you do not need to report them on the employee’s W-2.
Per the Internal Revenue Service (IRS), fringe benefits are taxable and must be counted in the recipient’s gross wages, unless the item is specifically excluded by law. Make sure your human resources and payroll staff understand which benefits are taxable and how to properly document and report them. Even small oversights—like forgetting to include personal mileage on a company car—can lead to underreporting. If you offer a dependent care assistance program, up to $5,000 per year per employee can be excluded from taxable wages. This includes daycare, preschool, and similar services for qualifying children or dependents. Amounts above that limit become taxable and must be reported as imputed income.
Line of business limitations is a federal income tax rule applied to fringe benefits that employers provide their employees. Taxable fringe benefits are usually subject to withholding when they are made available. Employers and employees are required to claim the fair market value of taxable fringe benefits. This may differ from the amount an employer paid for the benefit because companies may receive corporate discounts. As a small-business owner, you may choose to provide your workers with fringe benefits on top of their normal pay rate.
