How to Calculate Imputed Income for Domestic Partner Benefits
How to Calculate Imputed Income for Domestic Partner Benefits

How to Calculate Imputed Income for Domestic Partner Benefits

Providing benefits to employees’ domestic partners operates differently to provide benefits to legal spouses and dependents. Employers have to calculate the domestic partners ‘imputed income’. If you don’t know how to do that, don’t worry—we’ve prepared this guide explaining everything you need to know.

When is a domestic partner treated like a spouse?

If one of your employees gets married, their spouse is entitled to some tax-free benefits offered by your company; health insurance is the primary one. If, however, that same employee is in a domestic partnership, no such luck… with one exception. If the domestic partner can also be claimed as a tax dependent on the employee’s income taxes, they’re treated like a spouse. To qualify as a dependent, the domestic partner must live with the employee full-time, have gross income of $4,300 or less (for 2020), and receive more than half of their total financial support from the employee.

What is imputed income?

If you determine that domestic partners don’t qualify as a dependent and they receive health benefits, the contribution you make toward any premium is counted as a type of employee income called imputed income. That can come as quite a shock to employees who might incorrectly believe that a legal domestic partner’s coverage is the same as a married couples.

It’s important to highlight this detail in your open enrollment materials to eliminate any unwelcome surprises around domestic partner coverage when payday or year-end rolls around.

How to calculate imputed tax

Just like their regular pay, this imputed income is taxable income for the employee. You are responsible for calculating the estimated fair market value (FMV) of those health benefits so you can report the additional employee income to the IRS, pay your business’s share of FICA taxes and deduct that expense from your business income.

Note: It’s not required that you withhold federal tax or state income tax. Most companies calculate this amount at the end of the year and report the value of the benefit as income on the employee’s W-2 for that tax year.

So, how do you determine what “fair market value” is?

Unfortunately, the IRS doesn’t offer clear guidance on this subject, so it’s left up to you to figure out. But don’t worry, we’ll give you a head start.

One simple way to do the calculation is to determine the difference between your company’s cost of an employee-only monthly premium and the cost of an employee-plus-one monthly premium. Multiply that number by 12 and you will get your total.

For example:

Employee-only premium

Employee-only premium = $600
Employer pays = $450
Employee pays = $150

Employee-plus-one premium


Employee-plus-one premium = $1250
Employer pays = $937.50
Employee pays = $312.50

Calculation


$937.50 - $450 = $487.50/month
$487.50 x 12 months = $5,850

Paycor can help

If all these calculations are making your head spin, we totally get it. When you partner with a provider who can manage payroll complexities like imputed income, wage garnishment and child support, you can offload the headaches, so you can focus on impacting your bottom line. Talk to Paycor and discover how we can help you remain compliant while giving you back time in your day.


Paycor guided hr software tour

More to Discover

Demotion Letter Template

Demotion Letter Template

There’s nothing better than seeing employees thrive, but setbacks and slips in performance do happen. One way to address performance problems is a demotion. Sometimes, it’s necessary to take a step back before you can take two steps forward. Download Demotion Letter Template When is a Demotion Necessary? In an ideal world, there wouldn’t be demotions. They are a sign something’s wrong: it could be that an employee has failed to respond to a performance improvement plan or they could just be disengaged. A demotion is the last stop before termination. If you believe the person has potential and is worth investing in, then a demotion might be the best way forward. Demotions are risky, though. You could end up with an employee who is even...

Maximum PTO Accrual Letter

Maximum PTO Accrual Letter

Encouraging employees to use their vacation days can feel strange. After all, nobody wants to leave themselves under-staffed and the rest of their team over-worked. On the other hand, what if employees rarely ever, or even never, take time off? That’s been a question facing business owners this year, as vacation plans were delayed, then cancelled, and PTO built up like never before.One problem is, PTO payout laws can turn unused PTO into an unwanted financial liability. There’s also a risk of schedule chaos down the line as everyone tries to use their days up at once. Most worrying of all is that employees who go too long without a break, even by choice, risk ending up disengaged and burned out. Download Sample Maximum PTO Accrual Letter...

How Long to Keep Payroll Records

How Long to Keep Payroll Records

Running a business, you know that compliance isn’t just about being compliant—you also need to prove it. You never know when the IRS, the DOL or the EEOC will demand to see your paperwork, which is why it’s so important to retain payroll records. To make things more complicated, each agency has its own rules for which documents you have to keep and for how long. The good news is, you don’t have to buy more filing cabinets. HR software can automatically store everything you need, with the added benefit of simplifying the whole payroll process. Why You Need to Retain Payroll Records At a federal level, you’re keeping payroll records primarily for three agencies: The IRS The Department of Labor (Wage and Hour Division) The EEOC These...

Webinar: How to Meet 2021 Anti-Harassment Training & Policy Requirements - 1/28 @11AM ET

Webinar: How to Meet 2021 Anti-Harassment Training & Policy Requirements - 1/28 @11AM ET

This session is eligible for 1 HRCI and 1 SHRM credit.2021 has arrived. Have you trained your employees on anti-harassment requirements?Join our webinar for the latest updates on new and pending anti-harassment legislation and learn best practices for meeting (and exceeding) the mandates within your organization.Topics included are: - New training and policy requirements - Pending legislation - Key deadlines and effective dates for 2021 - How you can meet the mandates in 2021 Speaker: Jill AlbrechtJill Albrecht is a labor and employment law attorney, as well as a compliance subject matter expert. She is also a former shareholder at Littler, the world’s largest labor and employment law firm. Jill regularly conducts anti-harassment and...