When offering perks and benefits, HR teams aim to provide value to their people without adding hidden tax obligations. However, some benefits—like group life insurance over a certain threshold or personal use of a company car—are considered taxable income as imputed income.
HR teams can proactively manage imputed income to deliver impactful, tax-smart benefits that align with both company goals and their people’s wellbeing. In this article, we’ll explore what imputed income is, how it affects tax calculations, and strategic ways HR teams can handle it to support their people effectively.
What is imputed income?
Imputed income refers to the value of non-cash employee benefits that team members receive as part of their taxable income. Some of these benefits, like providing health insurance for non-dependents or support for adoption processes, aren’t part of regular wages but are still taxable according to the IRS in the United States and HMRC in the United Kingdom.
How does imputed income impact taxes?
Imputed income increases a professional’s taxable income, which can result in higher taxes. Non-cash benefits—like life insurance over $50,000 or personal use of a company car—become part of their taxable wages, affecting federal income tax, Social Security, and Medicare taxes in the US. Employers calculate and report the value of these benefits on their team member’s W-2 forms.
What are fringe benefits?
Fringe benefits, or non-cash rewards, are extra perks people receive on top of their regular pay. Typical company perks include health insurance, gym memberships, and education assistance.
Some fringe benefits are taxable and need to be reported as imputed income, while others, like health insurance, may be tax-exempt. The IRS Publication 15-B and the HMRC provide guidance on which fringe benefits are taxable in their respective countries.
What’s included in imputed income? Imputed income examples
Imputed income covers all the non-cash benefits your team members receive, like:
Gift cards
You can use gift cards to show appreciation for a job well done or celebrate milestones. People typically love receiving gift cards because they offer flexibility—whether for a favorite store or restaurant.
Moving expense reimbursement
Moving expense reimbursement helps ease relocation costs. Companies can make transitions smoother for new hires or people taking on a role in a different location.
Company vehicles and housing
Access to a company car or housing offers huge convenience, especially for team members who travel frequently or have relocated for work. If an employer provides a vehicle for a team member to use for both personal and business purposes—and the person takes it home at the end of the day—it’s considered imputed income.
Adoption-related assistance
Adoption assistance programs provide financial support to team members looking to grow their families. This helps cover costly adoption fees and makes it easier for team members to focus on the joy of the process.
Employee discounts and memberships
Team member discounts or company-paid memberships at the gym, workout studios, or social clubs are popular perks that make everyday life more affordable.
Non-dependent health insurance
Non-dependent health coverage counts as imputed income because it extends beyond traditional employee health plans. A non-dependent is usually a partner, spouse, or someone over 18 living at your home.
Education assistance
Education assistance allows team members to grow their skills and advance their careers without a heavy financial burden. This professional development perk can include tuition reimbursement, covering certification costs, and even sponsoring advanced degrees or specialized training programs.
Group-term life insurance over $50,000
Group-term life insurance gives a team member’s family financial security in the event of their death. Life insurance is usually tax-free until $50,000 and amounts over that are considered imputed income. This is still a great benefit since the company provides security at minimal cost for the team member.
What isn’t included in imputed income?
Plenty of perks and contributions don’t require tax payments in the US or the UK. These non-cash benefits are usually exempt because they’re necessary for work or fall under specific exemptions. They include:
- Health insurance for team members: Standard health insurance coverage provided to team members
- Retirement plan contributions: Employer contributions to qualified retirement plans, like a 401(k) in the US or a pension scheme in the UK
- Business-related travel and meals: Expenses for work-related travel and meals that fall within the scope of work
- De minimis benefits: Small, infrequent perks—like coffee, occasional meals, or small gifts—that are minimal in value
- Employee assistance programs (EAPs): Support services such as counseling or mental health programs
- Professional development and education: Education or training directly relates to work
- Work-related equipment: Necessary tools like laptops or phones, provided for job-related tasks
Organizations can offer these valuable perks to boost retention without creating extra tax burdens.
How to calculate imputed income
While calculating imputed income can vary depending on the type of benefit, here’s a simple process to follow:
- Identify taxable benefits: For example, moving costs, tuition reimbursement, or commuting benefits.
- Determine the fair market value (FMV): Calculate how much the benefit would cost if someone had to pay for it themselves.
- Apply exclusions and limits: Separate non-taxable portions of the benefit. For instance, in the US, group-term life insurance over $50,000 is taxable.
- Add imputed income to gross wages: Add the imputed income to the team member’s gross wages to reflect the true value of the non-cash benefits.
- Consider taxes like Social Security and National Insurance: In the US, imputed income affects Social Security and Medicare taxes, while in the UK, it impacts National Insurance contributions.
Getting your calculations right isn’t just about helping your team with their taxes—it also keeps your organization compliant with tax laws. Accurate imputed income reporting ensures transparency and prevents costly penalties during audits.
Use imputed income benefits strategically to support your people
Health insurance, company vehicles, and education assistance can all help you attract high-caliber talent. These perks provide tangible value beyond just salary, making your company more attractive and competitive.
Understanding imputed income opens the door to more holistic compensation packages with meaningful benefits and transparent tax implications. A balance of traditional pay and non-cash perks can give people excellent benefits that enhance their overall experience and boost long-term retention.
Imputed income FAQs
Should people report imputed income?
Yes, people must report imputed income because it’s part of their taxable earnings. Employers include imputed income on year-end forms, such as the W-2 in the US or P11D in the UK.
How is imputed income taxed?
Add imputed income to your team member’s gross wages, so it’s taxed together with regular earnings. However, employers don’t automatically withhold federal income taxes for imputed income, so people either request the withholding or pay taxes on the benefits in their annual tax returns.
Should you avoid imputed income?
HR teams can apply imputed income actively and strategically. Focus on understanding how imputed income impacts your people’s taxes so you can offer valuable perks without adding unnecessary tax burdens.
Recommended For Further Reading
What is imputed income in insurance?
In insurance, imputed income typically refers to the taxable value of benefits like group-term life insurance or health insurance for non-dependents. When coverage exceeds specific limits, the excess amount is added to taxable income. This helps you account for the full value of the benefit in tax reporting.
What is imputed income on a paycheck?
Imputed income on a paycheck refers to non-cash benefits that combine with a team member’s gross wages for tax purposes. It won’t change the take-home pay but will increase taxable income.
