To promote well-being in the workplace, many companies offer their employees a comprehensive
compensation package that goes beyond salary to include specialized resources and nonmonetary perks. Although these
fringe benefits have the potential to support employee satisfaction and productivity, they often come with extra costs — including tax implications.
The IRS closely monitors the value of certain noncash benefits, commonly categorizing them as imputed income. Business leaders and HR professionals must understand what imputed earnings are to properly manage compensation, maintain compliance with IRS regulations, and avoid unexpected complications during tax season.
What is imputed income?
Imputed income is the monetary value associated with noncash perks — also called fringe benefits — that the IRS defines as taxable income. Whenever a company provides taxable benefits, such as gym memberships or complementary meals, it must report and pay taxes on the cost of these transactions.
Each year, the IRS updates
Publication 15-B, which explains fringe benefits and tax exclusions. Employers should follow these rules carefully to properly report employees’ imputed income and avoid penalties.
Examples of imputed income
Employers typically work with a certified tax professional and reference
IRS guidelines in Publication 15-B for a comprehensive understanding of the benefits that qualify for federal income tax and payroll tax. There are many nuanced cases, but a few fringe benefits stand out as standard taxable events:
Tuition assistance for employees or their dependents that exceeds the IRS’s annual exclusion limit for qualified education assistance
Gym memberships provided or subsidized by the company
Employee discounts on company products or services that exceed a certain threshold
Personal use of a company-provided phone; the phone may not constitute imputed pay if it is primarily for business
Regular employee discounts on provided meals
Certain company-paid retirement planning services
What is excluded from imputed income?
Not every fringe benefit has income tax implications. Typically, the IRS doesn’t treat the value of benefits as imputed income if they’re deemed essential for an employee’s health and well-being. The IRS also waives de minimis benefits — nonmonetary perks that are impractical to report due to their low value.
Here are common imputed income exclusions:
Health insurance premiums paid by the employer
Low-value, infrequent benefits (e.g., snacks, coffee, or personal use of office equipment)
Employer contributions to qualified retirement plans, such as 401(k) matching
Are payroll advances part of imputed income?
On-demand pay is generally not considered imputed income because these payments represent wages employees have already earned. These types of financial wellness tools can offer meaningful support for employees seeking greater financial flexibility, often at no additional cost to the employer, making them an appealing option for HR teams looking to enhance their benefits offering.
Withholding and reporting imputed income
Employers are responsible for withholding and reporting imputed income as part of the
benefits administration process. They must calculate the fair market value for every taxable noncash benefit they provide, then add the amount to each employee’s
base pay to find their gross pay. Employers use this number to calculate income taxes and payroll taxes (e.g., Social Security and Medicare) and withhold them from cash wage payments.
At the end of the year, employers record imputed income in “Box 1 (Wages, tips, other compensation)” on each employee’s
Form W-2. They may also detail imputed income in employees’ pay stubs with a separate line item for each noncash benefit and its taxable cash value. This transparency helps employees understand why their taxable wages might be higher than their cash earnings.
Frequently Asked Questions
How does imputed income affect an employee’s federal tax return?
Imputed income increases an employee’s taxable wages, so they may see a slight decrease in their net pay on each paycheck due to the increased withholding. The employer reports imputed income on their W-2 as part of their gross income, which determines their income tax liability when filing a federal tax return. A higher taxable income could lead to a higher overall tax bill or a smaller refund.
Where can employees find imputed income on their paychecks?
Employers may itemize imputed income from employee benefits on team members’ pay stubs (e.g., “Personal Use of Company Car”). The value of this imputed income is added to employees’ salaries to calculate their
total taxable compensation for each pay period.
Does imputed income affect an employee’s gross income?
Yes, imputed income directly affects an employee’s gross income. Because imputed income is taxable, the value of noncash benefits is added to an employee’s cash earnings to calculate their federal income tax liability.
Can imputed income be reported on a 1099?
Most often, imputed income is reported on a Form W-2 as part of total earnings in Box 1 (Wages, Tips, and Other Compensation), Box 3 (Social Security Wages), and Box 5 (Medicare Wages and Tips), as applicable. However, employers might use Form 1099 for nonemployees, such as contractors or former employees, in cases where a benefit is provided and taxed.
Is imputed income good or bad?
Imputed income may seem unfair since it adds to tax liabilities without putting cash in employees’ pockets. However, it represents real income in the form of tangible benefits.
If an employee receives a taxable benefit, their employer must include it in their income for federal tax reporting. Employees who want to reduce their tax liability can forgo benefits that add to imputed income, such as gym memberships or a company car.
Offer EarnIn without increasing imputed income
Understanding imputed income is essential for HR and payroll teams. Having a clear grasp of these implications ensures compliance, improves transparency, and helps employees avoid surprises at tax time. It also positions HR teams to make more informed decisions when designing benefits strategies.
One of the most essential areas of support is financial wellness. When employees struggle financially, it affects both their personal lives and their productivity. That’s why more employers are turning to benefits that promote financial stability and flexibility.
EarnIn’s financial wellness tools make it easy to provide impactful financial wellness tools without increasing imputed income.
Earned Wage Access gives employees the flexibility to access a portion of their pay ahead of payday, helping them cover everyday expenses and unexpected costs. They can get up to $150 per day — with a max of $750 per pay period
— in minutes, starting at just $3.99 per transfer.
Tip Yourself lets employees effortlessly save with every paycheck, and
Credit Monitoring helps them track their credit score for free.
All EarnIn benefits come at no cost to employers, and no payroll integration is required.
Discover how EarnIn can enhance fringe benefits offering to increase retention and productivity without adding to business expenses.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
This Blog was sponsored by EarnIn. While the author received compensation, the information shared is grounded in independent research and intended to provide helpful and accurate guidance to readers.
EarnIn is a financial technology company not a bank. Banking Services are provided by Evolve Bank & Trust, Member FDIC. The FDIC provides deposit insurance to protect your money in the event of a bank failure. More details about deposit insurance here. A pay period is the time between your paychecks, such as weekly, biweekly, or monthly. EarnIn determines your daily and pay period limits (“Daily Max” and “Pay Period Max”) based on your income and financial risk factors as outlined in the Cash Out Maxes section of our Cash Out User Agreement. EarnIn reserves the right to adjust the Daily Max and Pay Period Max at its discretion. Your actual Daily Max will be displayed in your EarnIn account before each Cash Out. EarnIn does not charge interest on Cash Outs or mandatory fees for standard transfers, which usually take 1–2 business days. For faster transfers, you can choose the Lightning Speed option and pay a fee to receive funds within 30 minutes. Lightning Speed is not available in all states. Restrictions and terms apply; see the
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Lightning Speed Fee Table and
Cash Out User Agreement for details.
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here.
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