According to a recent benefits survey by Mercer, 70% of large employers and 53% of small business leaders are planning employee benefits program enhancements for 2023. One of the most important things to consider when you offer employee benefits is whether they are classed as imputed income. In other words, whether there are any tax implications to keep in mind.
So, what is imputed income, exactly? Do you need to report it to the IRS? And what is GTL imputed income?
These are just some of the questions we will be answering in today’s employer’s guide to imputed income.
What is imputed income?
Imputed income is the cash equivalent value of any non-cash benefits your W-2 employees receive in addition to their salary or wages. These fringe benefits might include the use of a company car, gym memberships, educational assistance or any non-cash rewards or incentives such as gift cards, to name a few examples.
Although these benefits are not included in an employee’s salary, most (but not all) are still classed as income for tax purposes. This means that you have to include their cash-equivalent value in an employee’s gross salary and report them on your employees’ W-2 forms. You also have to pay FICA tax (Social Security and Medicare tax) on imputed income, unless the benefit is classed as exempt by the IRS (more on this below). You don’t usually have to deduct any federal income taxes from this form of income.
What is GTL imputed income?
So, what about GTL imputed income? Is it the same thing?
Let’s break it down.
The first $50,000 of coverage for any life insurance plan is classed as a tax-free employee benefit. However, if you offer employees a Basic Life Plan as part of a group term policy and coverage exceeds this $50,000, then the excess coverage amount is classed as gross GTL imputed income.
If you offer employees a Voluntary Life Plan with over $50,000 of coverage, assuming the employee’s rate falls below the IRS rates stated in Publication 15-B, the IRS could also classify this excess as GTL imputed income. However, it’s always best to review the terms of each plan type to determine how taxes are calculated as it can vary.
Examples of imputed income
Now that we’ve discussed the imputed income meaning, let’s take a look at a few examples to help you identify and categorize any benefits that you might be offering.
Examples of imputed income include:
- Use of a company or employer car
- Fitness benefits such as free gym memberships
- Vehicles that you provide to your employees for regular non-business use (owned or leased)
- Non-bonus cash and gift cards
- Moving expenses (if they are non-tax-deductible)
- Dependent care assistance in excess of $5,000 (the tax-free limit)
- Group-term life insurance in excess of $50,000 (the tax-free limit)
- Health insurance for non-dependents
- Income obtained if an employee exercises nonstatutory stock options
- Taxable income obtained from the issuance of restricted stock
- Non-business use of an employer-provided cell phone
- Transportation benefits in excess of pretax deferrals (Section 132 Plan)
- Meals and lodgings, unless they correspond to tax-deductible business travel
- Education assistance if it exceeds $5,250 (the tax-free limit)
- Adoption assistance if it exceeds the annually adjusted amount
Imputed income exemptions
You might also offer employees certain fringe benefits that are tax-exempt and not classed as imputed income. The most common of these, as we saw above, is Group Term life insurance that falls within the tax-free allowance ($50,000). If coverage exceeds this tax-free allowance then this excess is classed as GLT imputed income.
Here are a few more examples of imputed income exemptions:
- Health insurance for dependents
- Health savings accounts (HSAs)
- Dependent care assistance under $5,000
- Education assistance under $5,250
- Adoption assistance below the annually adjusted amount
- Small or occasional employer gifts (birthday cake, company-branded merchandise, etc.)
- Commuter benefits, up to a certain maximum amount
- Retirement planning services
- Qualified employee discounts
- Employer-paid disability insurance premiums
- On-premises fitness benefits, such as on-site gyms
- Meals and lodgings during business trips
- Entertainment and team-building activities
- Small cash gifts under $100
- Floral arrangements and fruit baskets
- Achievement awards of up to $1,600 for qualified plan awards
- Reimbursements for any of the above that the employee has already paid for out of pocket
How to report imputed income: Step-by-step
As an employer, you have a legal responsibility to identify all imputed income generated by your workforce. You also have to calculate and pay all FICA taxes that might apply. Plus, you have to report this form of income in each employee’s IRS Form W-2. If you don’t, then the IRS can impose penalties.
Here’s a step-by-step guide to help you understand what you need to do.
Identify which fringe benefits are taxable
Start by reviewing the lists we shared above. Can you clearly determine from these lists whether all the fringe benefits that you offer are classed as imputed income or not?
If you’re still not clear then consider the following.
Imputed income tax implications generally depend on two things: the type of benefit and the amount. For example, if you offer life insurance, review your policies to see how much coverage you offer. If coverage exceeds the IRS’s tax-free allowance, then this benefit is not classed as imputed income. If it does, then you need to report the excess and tax it accordingly. The same applies to dependent care assistance, education assistance, and adoption assistance.
You also need to consider whether the IRS would classify the perk as a “de minimis fringe benefit”. This is when the IRS deems that it is administratively impractical to keep track of fringe benefits that have a cash-equivalent value of less than $100.
- Snacks or meals
- Gifts with a low fair market value
- Employer-branded merchandise
- Occasional sporting or entertainment tickets
- Occasional parties for employees
- Flowers, books, or fruit gifted under special circumstances
- Personal use of office copier or printer
Once you’ve identified which fringe benefits the IRS would classify as imputed income, the next step is calculating taxes.
As we mentioned above, most forms of imputed income are subject to FICA taxes. The FICA tax rate for 2023 is 7.65% (6.2% for Social Security and 1.45% for Medicare). So, for example, if you offer an employee a free gym membership with a value of $1,000 per year (assuming it’s not for a private gym located on your premises), then you must report and deduct $76.50 in FICA taxes for this benefit.
Things can get a bit more complicated in the case of fringe benefits without obvious cash values, such as the use of a company car. In these cases, you have to conduct research to determine each benefit’s fair market value. For instance, the cash equivalent value of the use of a company car would be how much it would cost an employee to lease that same car privately.
You can find out more about this by reading the IRS’s Employer’s Guide to Fringe Benefits.
Report imputed income on each employee’s IRS Form W-2
Make sure you report all imputed income on each employee’s W-2 form together with their regular gross income. You can do this in boxes 12a through 12d. You also need to add this information to gross employee wages in boxes 1 (other compensation), 3 and 5 (income that is subject to Social Security and Medicare taxes).
Find out more about IRS W-2s here.
Pay imputed income taxes
Finally, make sure you pay all calculated and reported imputed income tax deductions. You can do this every income period, quarterly, semiannually, or annually.
Although you can submit these payments manually, it can be risky doing it this way. This is especially true if you have a large workforce and/or offer a variety of fringe benefits. Most businesses choose to use payroll software to calculate and automate tax deductions and reduce the risk of human error.
How to manage employee compensation and benefits
At Factorial, we understand how daunting payroll can be, especially if you’re a new, small business. Aside from making sure that you pay your employees the correct amount at the end of each payment period and reimburse any expenses, you also need to keep up to date with your payroll tax obligations as an employer. This can be especially tricky in the case of imputed income.
Using the right payroll software can help you manage the entire process far more efficiently and effectively.
For example, our payroll software centralizes all your payroll processes through a simple and intuitive platform. You can access tools to help you calculate payroll taxes and imputed income deductions. You can also file tax documents like W-2s and 1099s. Plus, you can easily integrate your employee time tracking data so that your paychecks are consistently accurate. That way, you can be sure that you are IRS-compliant and that your workforce is fairly compensated at the end of each payment period.