The U.S. Department of Labor estimated that non-wage benefits equaled an average 32 percent of total wages in 2020. In most instances, employees enjoy these benefits without incurring additional tax burdens. However, this is not the case with imputed tax, which can add a significant tax burden. Consult with the human resources department at your place of employment or with a tax professional with specific questions about imputed taxes.
Definition
The Internal Revenue Service (IRS) imposes taxes on certain non-wage employee benefits perceived to have cash value. Among the types of benefits that are subject to taxation as imputed income are life insurance policies with benefits greater than $50,000 that are paid by your employer, employer-provided childcare benefits, reimbursements by your employer for moving expenses that are not tax exempt and personal use of automobiles provided by your employer.
Reporting and Paying Imputed Income
Imputed income is reported on your W-2 form; however, it is not normally subject to withholding unless you or your employer specifically specify that additional withholding should be deducted from your wages to cover the value of your imputed income benefits.
You may also pay your tax obligation for imputed tax benefits in a lump sum along with your other tax obligations at tax time. However, you may be subject to underpayment penalty if your total withholding is not sufficient to cover the taxes owed on your imputed income. Imputed income is also subject to FICA taxes for Social Security and Medicare benefits.
Imputed Tax for Those Who Aren't Married
A major difference in the rules for liability for imputed income tax is the fact that the IRS considers many benefits provided by employers to domestic partners to be imputed income subject to taxation.
Imputed income is reported on your W-2 form; however, it is not normally subject to withholding unless you or your employer specifically specify that additional withholding should be deducted from your wages.
These same benefits, such as healthcare benefits for domestic partners and their children, are not taxable for married couples and their dependents. As a result, employees who take advantage of domestic partner benefits often incur a greater tax burden than married couples receiving the same benefits.
Grossing up
One way some employers attempt to handle the difference in tax liability for employees who use domestic partner benefits is by "grossing up" the income of these employees to compensate for the additional tax burden.
Grossing up involves adding additional payments to employee wages equivalent to the amount of the tax liability for the imputed tax, plus an additional payment to cover the tax liability for the initial bonus payment.
For instance, for an imputed tax benefit valued at $200 for each pay period, the employer adds $40 to the employee's wages to cover the 20 percent tax liability for the imputed wage benefit, plus another $8 to cover the tax liability for the original $40 bonus.