Imputed income is the addition of the value of cash/non-cash compensation to an employees’ taxable wages in order to properly withhold income and employment taxes from the wages. Imputed income is taxable to the assignee (unless specifically exempt). Because it is delivered for the performance of services (related to employment) it must be included in the assignee's Form W-2 to accurately reflect the assignee's taxable wage-related income.
Imputed income is reported on Form W-2. Imputed income is not subject to the federal income tax withholding rules. Employees may choose to have federal income tax withheld on the imputed income or pay what may be due when filing their federal income tax return. Tax penalties may apply if the employee has not withheld enough federal income taxes on the imputed income. Imputed income is subject to withholding for FICA tax purposes. Imputed income is also often relevant to determinations of support payments in divorce.
Examples of imputed income include:
- Dependent care assistance that exceeds the tax- free amount.
- Adoption assistance that exceeds the excluded amount.
- Group term taxable life insurance coverage over $50,000.
- Unsubstantiated employee business expenses.
- Personal use of employer-provided car.
- Educational assistance above the excluded amount.
- Non- deductible moving expense reimbursements.