Updated: September 9, 2025
What is imputed income: Definition and meaning
Also known as imputed earnings, imputed income refers to the cash value of any taxable, non-cash benefits employees receive. Some examples of these non-cash or “fringe” benefits are the personal use of company vehicles, gift cards, non-dependant health insurance, and gym memberships. Imputed income holds monetary value and in turn, counts towards an employee’s gross income and affects their tax situation.
How to calculate imputed income?
To calculate imputed income, determine which non-monetary benefits count as imputed income under IRS tax laws. Then, estimate the fair market value (FMV) of these benefits through market comparisons, IRS guidelines, and third-party valuations.
From there, deduct any contributions an employee may pay for their benefits from the FMV. Next, apply any exclusions that may reduce the taxable amount of the benefits. Your end result will tell you the employee’s imputed income.
How much will I pay in taxes for imputed income?
The current FICA tax rate will help you determine how much you’ll pay in taxes for imputed income. For 2025, the FICA employee tax rate is 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax). As an employer, you’ll pay your portion of the FICA taxes on the fair market value (FMV) of imputed income or taxable non-cash benefits you provide to your employees.
What is imputed income on a paycheck?
Imputed income will be recorded on an employee’s paycheck under “taxable benefits” or “employer paid benefits” so that it can be taxed appropriately. While it won’t typically affect their paycheck, it will likely influence the amount they owe in taxes.
Keep in mind
An employer may have to add imputed income to an employee’s W-4 tax form if they allow them to use a company vehicle for personal reasons, provide housing, cover dependent care, or pay for tuition or a gym membership.
How does imputed income show up on W-2?
Employers record imputed income on a W-2 in boxes 1, 3, and 5 with the total value in box 14, along with an employee’s regular wages. When an employee files their taxes, they’ll add this total amount to their tax return to ensure accurate reporting to the IRS.
Why is imputed income taxed?
Imputed income is taxed by the IRS because it has monetary value. Employees must pay federal, state, and FICA taxes on it, even though it doesn’t provide them with cash, like their hourly wages or salary. Since imputed income will increase an employee’s taxable income, it will likely affect their tax liability as well.
Using imputed income in a sentence
“When I looked at my W-2 this year, I noticed imputed income listed because my employer covers my spouse’s health insurance, and HR explained that the IRS considers that a taxable benefit.”
Terms related to: Imputed income
Articles and resources related to: Imputed income
