Imputed income: what it is and why it shows up on your pay stub

What imputed income means

Some benefits become taxable once they go over a limit, so the payroll system puts a dollar value on the extra and adds it to your wages. You do not get that money in a paycheck, but you may owe tax on it.

The IRS's guide to fringe benefits gives the standard example. The cost of group-term life insurance beyond $50,000 worth of coverage must be included in an employee's wages, and it is subject to Social Security and Medicare taxes. Withholding of federal income tax on it is optional for the employer.

How it shows up on a pay stub

Look for a line with the name of the benefit, such as group term life. It raises your taxable wages but adds no cash, so your take-home does not go up.

At year end it appears in the wages on your W-2. The IRS says it goes in boxes 1, 3 and 5, with code C in box 12 for the group-term life amount.

What it means for a household

Imputed income is small for most people, but it can surprise you: the net pay is a few dollars lower than you expected, or a tax bill is a little larger. Check your stub when you start a new job or change benefits.

If you and your partner both have benefits, compare stubs. If one of you has an imputed line, expect it to show up on a W-2 as well.

A worked example: an imputed amount of $60

• Say your employer figures $60 of imputed income on your stub this period (the amount is made up for the example).
• Your gross pay for taxes is $2,500 + $60 = $2,560.
• Social Security and Medicare apply to the $60: $60 x 7.65% = $4.59.
• No cash was paid for it, so your take-home drops by about $4.59, plus any income tax your employer chooses to withhold.
• Over 26 paychecks: $4.59 x 26 = $119.34 in Social Security and Medicare tax on a $1,560 yearly imputed value.