IMPUTED INCOME: Definition, Examples & How to Calculate it

imputed income domestic partner group term life insurance
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Imputed income remains the benefits workers get from their employer but is not part of their wages. You are most certainly already familiar with reporting regular wages on a W-2 form if you are a business owner with employees. However, you might not be aware of or familiar with other quantities or payment kinds that you need to disclose. Employees too might wonder how much they pay as imputed income on tax. Many might ask questions like “what is imputed income in reality?” Or, “how much does my spouse pay in tax as imputed income for group term insurance as a domestic partner?” In this article, we’ll explain what “imputed income” for a domestic partner is and its conditions regarding life insurance and domestic partners, along with some definitions and illustrations.

What is Imputed Income

These are benefits that employees receive but aren’t part of their salary or compensation. However, these benefits are still subject to taxation as part of an employee’s income. Some of the benefits that employees receive, such as food and health insurance plans, and several low-value benefits, are excluded from imputed income. It means they are exempt from taxation.

To enable the withholding of employment taxes, an employer has to add this income to the employee’s gross pay. Imputed income is excluded from an employee’s net salary, though. This is due to the fact that the benefit was already provided without payment.

Imputed income can be fringe benefits, which is a way an employer can compensate or reward their employees beyond their monthly salary. 

#1. Fringe Benefits 

These are taxable products, experiences, or services that an employer gives to workers in addition to their regular wages. For instance, employees must report the award as income, if they win a $300 gift card for winning in a fitness challenge at work.

Hence, even though the employee may not have to pay for these specific benefits, they are still liable for the tax the company owes on their value.

 Examples of taxable fringe benefits or imputed income

  • Personal use of a company or employer vehicle 
  • Prizes and awards
  • Wellness program incentives like membership fees to a country club or a gym.  
  • Gift cards in any denomination provided by the company
  • life insurance in excess of $50,000
  • Company’s employee discounts
  • Tuition reduction and educational assistance 
  • Dependent care assistance that is more than the tax-free threshold
  • Adoption assistance exceeding the tax-free amount
  • Dependent care assistance in excess of the tax-free amount
  • Health and dental insurance for non-dependent domestic partners or spouses
  • Basic or group life insurance exceeding  $50,000
  • Non-deductible moving expense or reimbursement for any class
  • Educational assistance exceeding the excluded amount

#2. What are Nontaxable Fringe Benefits?

Employers may enjoy a few fringe benefits without raising any concerns with the IRS. These benefits, known as “de minimis” (minimal benefits), are items whose value is so small that the IRS deems it administratively impractical to record or maintain an account.

Although there isn’t a set monetary limit for what qualifies as a de minimis benefit, it’s best to keep it under $75 because, according to the IRS, anything worth more than $100 is not a de minimis benefit.

Some nontaxable benefits include:

  • Company picnics
  • Flowers or fruit for a special occasion
  • Occasional tickets for theater or sporting events
  • Occasional personal use of a company copy machine
  • Accident and health benefits
  • Health savings accounts
  • Meals
  • Group-term life insurance with a value of up to $50,000
  • Employee discounts up to the tax-free amount
  • Adoption assistance up to the tax-free amount
  • Dependent care assistance that is not more than the tax-free threshold
  • Employer-provided cell phones used primarily for work

As an employer, it’s essential to know how imputed income affects employees’ taxes. The employee must include this sum in the W-2 form. Without this data, the employee might wind up paying less in taxes than necessary if imputed income was left out.

Therefore, employees need to report the imputed income alongside their gross wages on Form W-2. Imputed income factors into the wages you’ll report in boxes 1, 3, and 5. Since it’s subject to Social Security and Medicare taxes, you must add it to gross employee wages.

 As an employer, you can choose a different frequency to report fringe benefit value. Period reporting options include

  • Quarterly
  • Per pay period
  • Semi-annually
  • Annually.

Imputed Income on Life Insurance

A life insurance policy seeks to transfer the risk of financial consequences of an insuree’s dying and leaving the policy beneficiary without financial support. An insuree (policyholder) purchases a life insurance policy to assign this risk to an insurance company in exchange for a stream of payments. When the insured person passes away, the insurance may pay a death benefit in the form of a flat sum or a regular stream of payments (annuity).

Moreover, employers do offer their employees life insurance benefits. Therefore, as long as the death benefit is $50,000 or less, group term life insurance provided by your employer is regarded as a tax-free benefit. The IRS, however, mandates that the employee declare any group term life insurance payouts that exceed $50,000 as imputed income. Once the payment is regarded as income, the employee must pay taxes on it. Although benefits that aren’t a part of an employee’s direct financial compensation are included in imputed income, you can determine the amount for yourself in a few different ways.

Calculating Life Insurance Imputed Income

You can personally calculate your imputed income value of life insurance of more than $50,000. And, you can determine the tax liability your employer will add to the W-2 tax form at the end of the year. Your age and the IRS schedule below determine the imputed income value.

 Age Monthly cost per $1,000 of excess coverage
Under 25$0.05
25-29$0.06
30-34$0.08
35-39   $0.09
40-44$0.10
45-49  $0.15
50-54 $0.23
55-59  $0.43
60-64  $0.66
65-69 $1.27
70 and over    $2.06

When figuring out imputed income for life insurance, there are two things to think about. One of these things is whether or not your employer offers you basic or optional life insurance. The main difference is that with voluntary life insurance, the employee pays some of the cost, but with basic group life insurance, the company pays for it all. So, each of the examples below is a little bit different, depending on the type of plan you have.

For example,

#1. Basic Life Insurance

If a worker is 50 years old at the time and has a basic $100,000 life insurance plan. In accordance with the IRS table, you will be assessed $0.23 for every $1,000 over $50,000. The death benefit in this illustration is $100,000.

Calculation

Extra insurance: $50,000 in coverage less a $100,000 excess death benefit equals $50,000.

Imputed income each month: ($50,000/$1,000) x 0.23 = $11.5

Annual imputed income: $11.5 x 12 months = $138 

The employee’s W-2 form will then, at the end of the year, include $138 from the company.

#2. Voluntary Life Insurance

If a worker pays $200 per year for a voluntary life insurance policy with a company that offers a death benefit of $300,000. The worker is currently 57 years of age. According to the IRS table, this employee will be in the 50–59 age bracket and pay $0.43 for every $1,000 of coverage.

Calculation

Excess coverage = $300,000 – $50,000 = $150,000

Monthly imputed income = ($150,000 / $1,000) x 0.43 = $107.5

Yearly imputed income = $107.5 x 12 = $1290-$200 (what the employee pays in premiums) = $1,090

The IRS lays out the monthly cost of taxable income per $1,000 of excess coverage in the table below. This is for coverage above and beyond the term life insurance death benefit of $50,000.

Imputed Income Domestic Partner

If one of your employees marries, their spouse will be eligible for various tax-free benefits from your business. These benefits can be dental, vision, or health insurance. However, you’re unlucky if the same employee is involved in a domestic partnership. If a domestic partner can be claimed as a tax dependent on the employee’s income taxes, they are recognized as spouses. The domestic partner must depend on the employee for more than half of their total financial support, reside with them full-time, and have a gross income of $4,300 or less (for 2020).

Domestic partner benefits are subject to taxation for employees since registered domestic partners are not considered the employee’s spouse for federal income tax purposes.

Therefore, benefits for a domestic partner of an employee can be regarded as imputed income, if they are not legally recognized as spouses or dependents by the Internal Revenue Service (IRS). To prevent your domestic partner from being taxed on imputed income, it is advised to determine the cost of the premium your company would pay for your partner’s insurance and determine the taxes you would be required to pay.

Most businesses that offer benefits to domestic partners also have an anti-discrimination policy that covers sexual orientation. 

However, there is a new law in California that allows same-sex couples to enter into a registered domestic partnership. where couples must be of the same sex and at least 18 years of age. The law also states that employees can now enroll a domestic partner in their health, dental, or vision benefits. It is crucial to ensure that your sexual orientation is not the problem and to verify that your company has this policy before signing up for benefits.

Imputed Income Group Term Insurance

An employer typically provides group term life insurance as a benefit, but you may have the option to purchase additional coverage.

There are things to consider while enjoying group term insurance from your employer.

First, It’s crucial to keep in mind a few crucial facts when deciding whether you should stick with the group term life insurance provided or look for an option elsewhere.

Secondly, verify the cost of the premiums (if any) and whether the policy is portable in the event that you leave your employment.

Additionally, you should confirm the death benefit to see if it would be sufficient to meet your family’s needs in the event of an emergency.

However, imputed income from group term life insurance is taxable, unless it falls under an exemption. The IRS considers fringe benefits like a group-term life insurance policy worth more than $50,000 to be imputed income, so it is taxable. Taxes for Social Security and Medicare will apply.

Conclusion

It is inarguable that imputed income is products, experiences, or services given to workers but aren’t included in their salary. An employee may not have to pay for these benefits, but they are liable for the tax the company owes on their value. However, an employer should ensure the employees include their imputed income in their gross wages on form W-2. As an employer, you can choose a different frequency for reporting employee fringe benefits. Without this data, an employee might wind up paying less in taxes than necessary if they don’t report it.

Imputed Income FAQs

How often is imputed income taxed?

Imputed income is included in the amount used to determine your income tax withholding rate but is reported on your annual W-2 Form.

Is domestic partner imputed income taxable?

Yes, for federal tax purposes, registered domestic partners are not considered spouses. The employee receiving benefits from a partner may be required to pay federal income tax on the value of the benefit, known as “imputed income,” and Registered Domestic Partners (RDPs) are not permitted to file joint federal returns.

What is imputed income and how is it calculated?

Imputed income remains the benefits workers get from their employer but is not part of their wages. For example, if a worker is 50 years old at the time and has a basic $100,000 life insurance plan. In accordance with the IRS table, you will be assessed $0.23 for every $1,000 over $50,000. The death benefit in this illustration is $100,000.

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