Imputed Wages

Today TaxMama hears from Vicki in Washington State, with this quick question. “Does imputed income affect Social Security and Medicare taxes as well as federal taxes?”

Dear Vicki,

Well, first you need to understand what imputed income is.

It’s income that you don’t necessarily receive, kind of like ghost income. But it’s income that someone is supposed to record by law.

For instance, when you have below-market interest rates on loans between family or friends. IRS sets an interest rate (monthly, in fact) for the minimum you are allowed to charge on a loan. So, when your dad gives you a 0% loan, there is an imputed rate of interest – even though you are not paying. For instance, Dad has to report interest income at 3.81% for a long-term loan issued in May of 2009 – even though he doesn’t receive a dime. http://www.irs.gov/app/picklist/list/federalRates.html

In that instance, Social Security and Medicare are not affected.

However, when you are an employee, and your company pays for health insurance coverage for non-dependents, that is imputed income to you. IRS has ruled that this imputed income is treated as supplemental wages – and all the regular payroll taxes are to be assessed – income tax withholding, Social Security and Medicare. http://www.irs.gov/irb/2006-37_IRB/ar09.html

And remember, you can find answers to all kinds of questions about imputed income and other tax issues, free. Where? Where else? At TaxMama.com

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