Do you drive a company car? Did you receive a gift card from your employer for stellar performance? Guess what—you have to pay taxes on the value of those items. Fringe benefits sometimes are overlooked as taxable income and most employees have never heard of imputed income, but the IRS isn’t looking for excuses. Here’s what you need to know about both.
What is Imputed Income?
When an employee receives non-cash compensation that’s considered taxable, the value of that benefit becomes imputed income for the employee. Unless specifically exempt, imputed income is added to the employee’s gross (taxable) income. It isn’t included in the net pay because the employee has already received the benefit in some other form. But it is treated as income and so employers need to include it in the employee’s form W-2 for tax purposes.
Imputed income is subject to Social Security and Medicare tax and employment tax withholding but isn’t entirely exempt from federal income taxes and may require the employee pay the necessary dues when he/she files a federal tax return.
Some examples of imputed income include:
- Adding a domestic partner or non-dependent to your health insurance policy
- Adoption assistance surpassing the excluded amount
- Educational assistance surpassing the excluded amount
- Group term life insurance in excess of $50,000
Imputed income may also be used to determine an amount for child support payments. Depending on the state, imputed income consideration is meant to give the judge a more precise view of a noncustodial parent’s total income, helping to determine an accurate child support amount.
What is a Fringe Benefit?
A fringe benefit is a form of taxable pay—in services, goods or experiences—given to employees in addition to their regular wages. For example, employees receive a $100 gift card for completing a fitness challenge at work—you have to report it as income.
Some examples of fringe benefits include:
- Using a company car for personal activities
- Wellness program incentives, including country club or gym membership fees
- Gift cards, regardless of dollar amount
- Prizes and awards (Did you win an iPad?)
What are Nontaxable Fringe Benefits?
There are a few fringe benefits employers can indulge in that won’t raise any red flags with the IRS. Called a “de minimis (minimal) benefit,” this is something worth so little that the IRS considers it administratively impractical to record or keep an account.
While there’s no official dollar amount defining what makes a benefit de minimis, it’s best to keep it less than $75 because the IRS says anything $100 or more is definitely not considered to be a de minimis benefit.
Some de minimis benefits include:
- Company picnics
- Flowers or fruit for a special occasion
- Holiday or birthday gifts with a low fair-market value
- Logo-branded t-shirts and trinkets (stress balls, water bottles, keychain, etc.)
- Occasional tickets for theater or sporting events
- Occasional personal use of a company copy machine
It can be confusing to keep track of what’s taxable income and what’s not. You can always review the IRS’ Fringe Benefit Guide for the latest information on imputed income. And remember, Paycor is here to help your organization with any Payroll & Tax needs you require.
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