Most of the employers know about withheld income and its manner of reporting in the respective forms. However, when it comes to imputed income and its disclosure, many are clueless. For instance, did the organization provide the employees with services such as a company car or other star performance benefits? Well, employee benefits need to be disclosed as well. That is known as imputed income and it is important to disclose that as well.
In this article, we will talk about imputed pay, what does imputed mean, what is imputed income, imputed income benefits, and more. Fasten up and listen hard.
What does Imputed Income Mean?
The first question which arises in everyone’s mind after hearing the term is, “what is imputed income?” The question is a valid one, given that not many organizations realize the importance of disclosing the facilities they provide to their employees. While the reality is that these benefits are also a part of their income. The non-cash compensation received by the employee is considered taxable and is termed imputed income. The only way relief can be availed on this income is when it is expressly exempted. However, this income is not shown as a part of the net take-home pay of the employee. Instead, it is disclosed in the Form W-2 of the employee.
Here are some examples that will further answer the question, “What is imputed income?”
- Personal use of the company car
- Employee discounts
- Education assistance (self or dependent)
- Group term life insurance
- Moving expense reimbursements
- Gym membership
- Adoption assistance
The list mentioned above is not exhaustive. There are various types of imputed pay, and these depict a few. In most cases, imputed income includes fringe benefits and is usually added to the gross pay of the employee for accurate withholding of the taxes.
There are also certain fringe benefits that are exempt. Mostly, the IRS suggests that any amount below $100 can be exempt. A few examples are:
- Tickets for sporting events
- Tickets for cinema
- Picnics and offsite
- Birthday or holiday gifts
- Company swag in the form of t-shirts, trinkets, and more
While understanding the concept is easy, how to implement it? To be more precise, how can one report imputed income? Let’s find out.
How to Report Imputed Income your Employees?
Employee’s W-2 form discloses imputed income. The procedure is simple. The income calculation of each employee is typical, just like their normal wages. In most cases, withholding taxes from imputed income is unnecessary, but the exemption does not exist in certain cases. Thus, the employees can either pay the entire amount due at the time of filing their returns or can withhold federal income tax from imputed income.
However, the organization needs to intimate the employees in the case of insufficient withholding and the penalties therein. Also, the best course of action is always to hire an advisor, who is a professional person with the updated and correct knowledge on the matter. By hiring an advisor for the organization, you can ensure that the calculations and withholding are correct.
Calculating imputed income is a tricky business. While it is easy in the case of obvious benefits such as insurance or even adoption assistance, measuring imputed income if you have leased a vehicle to the employee for personal use becomes a little difficult. In that case, the organization determines the fair market value, according to the usage.
Here’s the periodic frequency of disclosing imputed earnings:
- Per pay period
- Quarterly
- Bi-monthly
- Annually
How to Use Imputed Income to Determine Child Support?
While imputed pay or imputed income refers to set employee fringe benefits that need to be reported accordingly, it behaves differently when it comes to determining child support. To understand this, let’s first know what child support withholding is.
Child support withholding refers to a payroll deduction that is mandated by the court. In fact, so stringent are the laws therein that the employer may get a withholding notice if the court notices a lack of child support deductions from the employee income. Additionally, if there is an unpaid child support debt in the name of a non-custodial parent who happens to be your employee, an Income Withholding for Support order or an IWO is sent, either by the court or by a child support agency. There are penalties in case child support is not withheld after an order has been served. Further, the organization does not have the right to terminate an employee on the grounds of child support withholding.
The child support deductions limit is calculated on the basis of the employee’s disposable income.
Coming to what role does imputed income play in the whole child custody matter, the judge usually uses the imputed income to deduce the paying capacity of the person. A good example of this can be a scenario wherein a person is not earning due to unemployment. In such a case, the court may order a smaller amount of child support, basis the imputed income instead of the disposable one. This cracks down on the malpractice wherein individuals either dump their jobs or take up low-paying ones for some time to escape child support. However, in certain cases, where the reasons for unemployment are genuine, the judge may decide to impose no payment. In such cases, here’s how to take care of the calculations.
How to Calculate Imputed Pay for Child Support If the Parent is Unemployed?
There are certain factors that the judge considers. Those are:
- What is the earning capacity of the parent, basis the work history, previous earnings, and qualifications
- Salary slips or any recent proof of the parent’s last drawn income
- In case none of the above mentioned options work, the judge then imputes income based on full-time employment at the current minimum wage
What is Taxable Imputed Income and What is a Non-taxable One?
During the calculation of an employee’s imputed earnings, a few things can be included in the form, and there are a few that can be excluded. While it is not possible to create a comprehensive and a set list, a non-exhaustive list that keeps on expanding is enough to have an idea of what to include and what not.
Here are a few things to include while calculating imputed earnings of the employee:
- Group term life insurance that exceeds $50000
- Personal vehicle usage
- Non-deductible moving expense reimbursements
- Fitness services (gym membership)
- Adoption assistance
- Assistance for caring for dependents
- Discounts on company goods and services
Here are a few things to exclude while calculating imputed earnings of the employee:
- FLEX account
- Assistance for the care of dependent within the tax-free amount allotted
- Adoption assistance within the tax-free amount allotted
- Meals during meetings
- Meals during work travel
- Employee educational assistance within $5250
- Phones provided by the employer
Please note that this list is by no means exhaustive and is just here to create a fair idea of what constitutes imputed pay and what does not.
Do You Need to Report Imputed Income?
Imputed earnings are a crucial part of an employee’s income. Reporting the same is as essential as reporting the disposable income of the employees, for the computation of relevant taxes. Further, it also is an important part of child support, as guided by the respective court of law.
What is the system of calculating and reporting imputed earnings at your organization? Do tag us at @HarmonizeHQ and let us know.
