While the common idea of income involves the payment of money in exchange for a product or service, not all income arises in this manner. Imputed income is payment that someone receives for the same reasons that she receives cash income but in some form other than cash.
Because imputed income can be any type of non-cash income, it can arise in many different forms. A common form is employee benefits. In addition to a cash salary, many employers offer benefits to their employees such as insurance coverage or club memberships. While the employee may have never held the cash used to pay for that employee benefit, he may sometimes have to pay income tax on it anyway. The most common types of insurance that employers provide in this manner are health insurance and life insurance.
When two people live together, such as a husband and wife, it is common for one to be the principal wage-earner and the other to be the principal homemaker. In this case, whatever the homemaker receives for cooking, cleaning and child care could be considered imputed income because it is never clearly quantified. This imputed income generally avoids taxation. The imputed income in this scenario becomes evident when the homemaker decides to work full-time and employ someone else to cook, clean and look after the children because she would then have to pay someone to perform those services, and the performance of those same tasks would then become taxable. When employers offer personal services such as child care, this is another common type of imputed income, and it may be taxable.
When someone owns a piece of property and then chooses to live in it instead of renting it to someone else, she is receiving imputed income because she is performing the same act of consumption as any renter would and thus taking full advantage of the property she owns without paying any income tax on the value she receives thereby. This type of imputed income often goes untaxed and is very difficult to quantify because no one can know how much a renter would pay to live in a particular piece of property until she actually agrees to a certain amount of payment.
Situations of self-employment commonly give rise to situations of imputed income. For instance, a self-employed person may find it necessary to purchase a vehicle, computer or piece of real estate for business purposes, but the use of such property is almost always inextricably connected with the owner's personal life. In these cases, self-employed people then enjoy tax-free income, as they can deduct the price of such property from their taxable income as a business expense.