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Managing Imputed Income and Fringe Benefits in Justworks Payroll
To help business owners stay compliant, Justworks Payroll provides a way to record and collect taxes for extra benefits employees may receive, such as imputed income and fringe benefits. Below, we’ll go over the details of what imputed income and fringe benefits are, and how to record them in Justworks Payroll.
Imputed Income vs. Fringe Benefits
While often used interchangeably, imputed income and fringe benefits are not quite the same. A closer look at these terms will show their differences:
- Fringe benefit: Any perk or extra benefit provided to an employee in addition to their regular wages, which may or may not be considered taxable, depending on its nature and value. The IRS’ Employer’s Tax Guide to Fringe Benefits includes more details on what’s considered a taxable fringe benefit.
- Imputed income: The monetary value assigned to a taxable fringe benefit, which is the amount added to the employee’s gross income and treated like regular income for tax purposes. This compensation value gets added to the employee’s gross wages for tax purposes, and impacts the amount of income tax the employee owes.
Simply put, fringe benefit is a broader term that can include any extra benefit an employee may receive, while imputed income refers specifically to the taxable portion of the benefit.
We strongly encourage employers to consult with their accountant or tax advisor to confirm whether any fringe benefits they offer are taxable and what the taxable amount is that needs to be reported.
How Is Imputed Income Recorded on Tax Forms?
Imputed income must be reported on Forms W-2 and 940 because it is considered taxable income, and therefore, subject to Federal Income tax, Social Security tax, and Medicare tax. In some cases, imputed income can also be subject to taxation under the Federal Unemployment Tax Act (FUTA).
When imputed income is recorded, the compensation value is added to the employee’s gross wages so that it can be taxed. Then, the same compensation amount is subtracted from the net pay since the value of the benefit was already received in non-monetary form.
Employees can typically expect an increase in taxable wages on a paycheck where imputed income was recorded, resulting in a lower net pay amount than on a paycheck with no imputed income included.
How Can I Record Imputed Income in Justworks Payroll?
Admins with ‘Make payments’ permissions can record imputed income in Justworks Payroll to ensure the applicable taxes are collected from the employee and included on their tax forms. Recording imputed income for an employee does not initiate a payment to them, instead, we apply the imputed income to the employee’s next paycheck and withhold the corresponding employee and employer taxes as a result of the additional income reported for the employee.
To start, click the ‘Payments center’ tab located on the lefthand side of the screen under the category ‘Payments' or click on 'Pay' on the lefthand side menu followed by the 'Add payment' button.
Once in the ‘Payments center,’ select ‘Record payments’ from the menu at the top of the page.
Screenshot showing the 'Record payments' section of the Payments Center.
Next, check off the member(s) you need to record imputed income for. Imputed income can be recorded for multiple members if they’re on the same pay schedule, however, imputed income must be recorded separately for members on different pay schedules.
Screenshot showing the Imputed income page where admins can select members to record imputed income for.
Then, you’ll be able to choose the upcoming pay date on which the applicable taxes will be withheld from the employee’s paycheck.
Screenshot showing the 'Add payees' and 'Pay details' sections of the Imputed income page.
On the next page, you’ll be able to label the imputed income type as ‘Transportation’ or ‘Miscellaneous.’ Members listed as >2% S-Corp Shareholders will also have ‘Health benefits’ and ‘Health benefits (FICA and FUTA exempt)’ labels to choose from. A member’s S-Corp status can be updated by following these steps to make a compensation change.
Once you’ve selected a label, you’ll be able to enter the total taxable amount of imputed income.
Screenshot showing the second page of the Imputed income process where admins are prompted to choose an imputed income type and enter the imputed income taxable amount.
Once you’ve hit ‘Submit,’ you’ll receive confirmation that the imputed income was recorded successfully.
Screenshot showing the 'Success!' page that appears after imputed income has been submitted.
To review any recorded imputed income, you can return to your Dashboard and scroll down to the ‘Upcoming payments’ section. By clicking the ‘View estimate’ link next to the applicable pay date, you’ll be able to view all scheduled imputed income.
Screenshot showing an upcoming payroll estimate that includes imputed income for an employee.
If you need to make changes to imputed income that’s already been recorded, you will be able to do so as long as it’s before the processing date of the payroll it’s included in. You can follow the steps for updating a one-time payment to edit or delete the imputed income amount.
Disclaimer
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.