Imputed Income: A Guide for Small Businesses

Providing perks like company cars, gym memberships, or life insurance is a great way to support your team—but did you know they can also impact payroll and taxes? Many non-cash perks count as imputed income, so they need to be included in your payroll calculations.

If this is new to you, don’t panic. This guide breaks it all down with clear examples and simple steps. Plus, you'll see how tools like Homebase can make tracking and reporting imputed income easier than ever.

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What is imputed income?

Imputed income is the taxable value of any non-cash benefits or services you provide to employees. Non-cash or “fringe benefits” can include using a company car, life insurance, and even gym memberships.

While your team doesn’t physically receive the extra money on their paycheck to pay for these benefits, they do have monetary value. And that means the IRS wants their share of the taxes. 

So, if you provide taxable benefits, you’ll need to figure out the imputed income (taxable value) to include in your payroll calculations and tax your team accordingly.

Examples of imputed income

Non-cash benefits make your workplace more appealing, helping you attract top talent and keep them happy. But figuring out whether those benefits are taxable can be a bit tricky. To make things simpler, here are some of the most common taxable fringe benefits:

Personal use of a company vehicle

Driving a company car to and from work typically isn’t considered a taxable benefit. But using that same vehicle for weekend getaways or school pickups? That’s taxable.

Employer-provided housing

Ski resorts often provide free or subsidized housing for seasonal workers. If the value of these accommodations exceeds the IRS threshold, the difference is taxable.

Life insurance

Employer-paid group term life insurance over $50,000. 

Below-market loans

If you offer an employee a loan with an interest rate below the market rate, the difference between the market rate and the rate charged is considered imputed wages.

Dependent care assistance

Any dependent care benefits that exceed the tax-exempt limit (like childcare).

Fitness center/gym memberships

Company-paid gym memberships that are not part of an approved wellness program. 

Education assistance

Employer-paid tuition, books, or training costs are tax-free up to a limit, but anything over that amount isn’t.

Non-qualified moving expense reimbursements

Paying a team member to relocate? Not all moving costs are tax-free. If reimbursement doesn’t meet IRS requirements, it counts as imputed pay.

Non-taxable benefits (not considered imputed income)

Don’t have the bandwidth to take on the calculations for imputed income? Here are a few non-taxable perks you can provide:

De minimis fringe benefits

These are small, low-cost perks (typically under $100) that aren’t worth tracking for tax purposes. Think grabbing a coffee from the office kitchen, using the company printer for personal documents, or attending an occasional team lunch or holiday party.

Employee discounts

Employee discounts on company products or services are tax-free, as long as the discount isn’t too steep.

Working condition fringe benefits

Job-related perks that directly support work, like business travel costs, work phones, or professional development.

Health insurance premiums

Employer-paid health insurance premiums, including contributions to Health Savings Accounts (HSAs) and most healthcare plans.

Qualified transportation

Parking allowances, transit passes, and vanpooling are tax-free up to a set monthly limit.

Educational assistance

Employer-paid tuition, fees, books, and equipment are tax-free up to a set yearly limit.

Retirement planning

Some employer-provided retirement planning services are also exempt.

Group term life insurance

Employer-paid life insurance is tax-free up to $50,000.

Adoption assistance

Employer-provided adoption assistance is exempt up to a certain amount.

Figuring out what counts as imputed pay takes some getting used to, but it's essential for accurate and compliant tax filings.

How is imputed income calculated?

Once you’ve decided on the taxable benefits you’re offering your team, the next step is figuring out what they’re worth. That means determining the fair market value (FMV)—what someone would realistically pay for the same benefit out in the real world. Here’s how to do it:

• Market comparisons: Checking prices from vendors or service providers for the same benefit. 
• IRS guidelines: The IRS provides valuation methods for certain perks like personal use of a company car.
• Third-party valuations: When in doubt, use industry benchmarks or consult a tax professional.

Now that you have the FMV, you can calculate the taxable portion or imputed earnings that you’ll need to add to your team’s taxable wages. Let’s say your company provides free gym memberships. Here’s how you’d add the perk to your team’s taxable income.

• Step 1: Find the fair market value. For this example, let’s assume the average monthly cost of a gym membership is $50/month.
• Step 2: Determine employee contribution, if any. Assuming your company covers the full amount, the full $50 would be taxable.
• Step 3: Multiply this number by the benefit period. Assuming the gym membership is provided for a full year, that’s $50 × 12 = $600 in annual imputed wages.
• Step 4: Report and tax accordingly. Add the $600 to the employee’s taxable wages on pay stubs and W-2 forms. 

How does imputed income affect your paycheck?

Imputed income isn’t extra cash in your employees’ pockets, but it still appears on their pay stubs. That’s because the IRS counts it as taxable. This means it increases their taxable wages, which may slightly affect their withholdings for federal income tax, Social Security, and Medicare.

For example, let’s say an employee earns $20 per hour, works 160 hours a month, and gets a $50/month gym membership fully covered by the company. Even though they don’t see that $50 in their net pay, it’s still added to their taxable wages.

Here’s how that looks on their pay stub:

Taxable Wages:

Regular Pay (160 hrs @ $20/hr): $3,200.00

Imputed Income (Gym Membership): $50.00

Total Taxable Wages: $3,250.00

Deductions:

Federal Income Tax (Estimate: 12.5%): -$406.25

Social Security Tax (6.2%): -$201.50

Medicare Tax (1.45%): -$47.13

Net Pay: $2,595.13

Although imputed income doesn’t change an employee’s take-home pay directly, it increases their total taxable wages, which may impact tax withholdings and year-end tax liability. 

Imputed income for employers: what businesses need to know.

Whether you're keeping your team healthy with free gym memberships or giving them the freedom of a company car, those extras come with tax strings attached. To keep your business compliant (and avoid surprises at tax time), here’s what you need to know: 

Payroll tax implications

Your team might not be paying out of pocket for these perks, but the IRS still sees them as taxable income. Here’s what that means:

• Their taxable wages go up, which can lead to slightly higher withholdings for federal, state, Social Security, and Medicare taxes.
• Employees might notice a small drop in their take-home pay. Not because they’re paying for the perk itself, but because their total taxable income has increased.

How to track imputed income.

As the employer, you’re responsible for tracking and reporting your team’s imputed income. Here’s how to do it right:

1. Calculate fair market value (FMV). Use the steps outlined above to determine what the benefit is worth.
2. Record it in payroll. Add the FMV to the employee’s taxable wages to ensure their pay stubs and tax documents accurately reflect their taxable earnings.
3. Calculate your team’s federal, state, Social Security, and Medicare taxes based on their total taxable earnings. This includes their imputed pay and any other necessary payroll deductions. 
4. Communicate with employees. Your team may see higher taxable wages on their pay stub, even though their paycheck stays the same. A quick explanation of imputed income can clear up confusion and prevent tax time surprises.

Filing requirements

Don’t forget to report imputed income on W-2 forms at year-end:

• Box 1: Total taxable wages, tips, and compensation.
• Box 3 and Box 5: Social Security and Medicare wages (if applicable).

For benefits like personal use of a company car, you may also need to track business vs. personal mileage and provide additional documentation.

Stay on top of imputed income with Homebase. 

Don’t let complicated tax calculations prevent you from offering the best for your team. Homebase makes tracking and reporting imputed income easy, so you stay compliant without the extra admin work.

Here’s how Homebase Payroll helps:

Tracks taxable benefits.

Easily record imputed earnings for taxable benefits like gym memberships, company cars, and group-term life insurance directly in payroll—ensuring precise records of taxable benefits.

Adjusts payroll taxes in real-time.

Automatically calculates tax withholdings for federal, state, Social Security, and Medicare taxes—reflecting the imputed income in employees' taxable wages

Simplifies W-2 reporting.

Ensures imputed income is properly recorded on W-2 forms, including Box 1 (Wages, tips, and other compensation), and Boxes 3 and 5 for Social Security and Medicare wages, when applicable.

Gives employees full visibility.

Employees can easily access their pay stubs and see how their imputed earnings affect their taxable wages, reducing confusion at tax time.

Keeps payroll simple.

Syncs wages, time tracking, and benefits, in one place, reducing manual work and the risk of payroll errors.

Offering great benefits shouldn’t create extra stress at tax time. Let Homebase Payroll take care of imputed income tracking, so you can focus on creating a workplace where your team thrives. Get started today!

Frequently asked questions

What does imputed income mean for health insurance?

If you cover health insurance for non-qualified dependents, like a domestic partner or adult child over the IRS age limit, that portion of the premium counts as taxable imputed earnings and increases taxable wages.

Do employees have to pay taxes on imputed income?

Yes, employees have to pay taxes on imputed income. Since it counts as taxable compensation, employees have to pay federal, state, Social Security, and Medicare taxes on it. 

Where does imputed income show up on a W-2?

Your imputed income appears on your W-2 in Box 1 (total taxable wages) and Box 3 & Box 5 (Social Security and Medicare wages, if applicable). Employers may also need to report certain benefits, like personal use of a company car, in Box 12.

Do employers have to report imputed income?

Yes, employers must include imputed income in payroll records, properly withhold taxes, and report it on employees’ W-2 forms. Failing to do so can lead to compliance issues with the IRS.

Can employees opt out of imputed income?

Not exactly. Employees can’t opt out of imputed income for taxable benefits they receive. However, they can refuse optional benefits like a company-paid gym membership.

How do I reduce imputed income taxes?
While you can’t completely eliminate imputed income taxes, there are a few ways to minimize the impact:

• Use pre-tax benefits whenever possible. Certain benefits, like health insurance, HSAs, and FSAs, can reduce taxable income.
• Structure benefits wisely. Some perks, such as work-related training or educational assistance, may qualify as tax-exempt under IRS guidelines.

Work with a payroll provider like Homebase to accurately track imputed earnings, apply the correct withholdings, and ensure proper reporting.

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