Imputed Life Insurance: Understanding Your Coverage Benefits

Imputed life insurance is a term used to describe the tax implications of employer-subsidized life insurance. The Internal Revenue Service (IRS) considers group-term life insurance provided by an employer as a tax-free benefit, but only if the policy's death benefit is $50,000 or less. When the death benefit exceeds this amount, the portion of the benefit that surpasses the $50,000 threshold is treated as taxable income for the employee, and it is referred to as imputed income. This imputed income must be included in the employee's W-2 form, and it is subject to social security and Medicare taxes. The calculation of imputed income depends on whether the life insurance policy is basic or voluntary, with basic policies being fully employer-paid and voluntary policies involving partial employee contribution.

Imputed income is a taxable fringe benefit

Imputed income is the value of any non-cash compensation an employee receives in the form of fringe benefits. While imputed income is not part of an employee's salary or wages, it's usually taxable and added to an employee's gross wages to withhold employment taxes.

Fringe benefits are perks that employees typically receive in addition to their regular salary. These perks tend to increase retention and can range from life insurance to tuition assistance to employee discounts. The IRS considers many fringe benefits as a form of taxable employee compensation.

Imputed income is included in the employee’s gross pay, rather than their net earnings, because the employee already received the benefit in some form. Imputed income is separate from the employee’s salary. However, because fringe benefits have a value, they need to be reported to the IRS, Social Security, and other appropriate tax agencies.

Imputed income is also commonly used by family courts to help determine child support and spousal support (alimony) amounts.

As an employer, you’ll need to withhold Medicare (FICA) and Social Security taxes from your employee’s imputed income, but you’re usually not required to withhold federal taxes from imputed earnings.

Your employees can pay the amount due on imputed taxes when filing their tax return or opt to withhold federal income tax from their imputed earnings. If employees don’t withhold enough federal income tax on imputed earnings, let them know that tax penalties can apply.

Examples of imputed income include:

• Memberships for gyms, wellness programs, health clubs, and country clubs
• Personal use of a company or employer-provided vehicle
• Gift cards, awards, and prizes, regardless of the dollar amount
• Group-term life insurance valued at more than $50,000
• Educational financial assistance and tuition reimbursement exceeding $5,250
• Dependent care assistance exceeding $5,000
• Adoption assistance exceeding the tax-free amount
• Moving expense reimbursements that are non-deductible

It applies when an employer-subsidised life insurance policy exceeds $50,000

Imputed income is a term used to describe the value of income tax that the Internal Revenue Service (IRS) places on employer-subsidised life insurance coverage when it exceeds $50,000. The IRS considers employer-subsidised life insurance, or group-term life insurance, to be a tax-free benefit as long as the policy's death benefit is $50,000 or less. This type of insurance is often provided as a common perk of full-time and salaried jobs, with companies using group term life insurance (GTL) policies to offer coverage to their employees.

However, when the death benefit payout of these policies exceeds $50,000, it is treated as taxable income by the IRS. This portion of taxable coverage is known as imputed income. It is important to note that this applies even if the employees are paying the full cost of the premiums. The imputed income value is determined by the employee's age and the IRS schedule. The IRS provides a table, known as the IRS Premium Table, which helps calculate the taxable portion of the premiums for coverage that exceeds $50,000. This table breaks down the monthly taxable income cost per $1,000 of excess coverage.

For example, consider an employee with a basic life insurance policy through their company that provides a death benefit of $150,000, which is paid entirely by the employer. If the employee is 47 years old, they fall into the 45- to 49-year-old range on the IRS table, incurring a cost of $0.15 per $1,000 in coverage. To calculate the monthly imputed income, the excess coverage ($150,000 - $50,000 = $100,000) is divided by $1,000 and multiplied by $0.15, resulting in a monthly imputed income of $15. This amount is then included in the employee's W-2 tax form at the end of the year.

It is important for both employees and employers to understand the impact of imputed income on taxes. Employees need to ensure they are not underpaying their taxes, while employers must include this information in their employees' W-2 forms to avoid undervaluing the amount of taxes their employees owe.

The IRS treats this excess as ordinary income for tax purposes

Imputed income is the value of the income tax the Internal Revenue Service (IRS) puts on group-term life insurance coverage in excess of $50,000. In other words, when the value of the premiums paid for by employers becomes too great, it must be treated as ordinary income for tax purposes.

The IRS considers group-term life insurance provided by an employer to be a tax-free benefit as long as the policy's death benefit is less than $50,000. There are no tax consequences if the group-term policy does not exceed $50,000 in coverage. However, if an employee is provided with over $50,000 in life insurance coverage and pays less in premiums than the IRS has deemed the policy to be worth, the value of the life insurance policy in excess of what an employee pays in premiums is referred to as imputed income and is subject to income taxes.

For example, if you have a group life insurance policy that has $100,000 in coverage and your employer pays the premiums for the insurance, the life insurance would be subject to imputed income because the death benefit of the plan exceeds $50,000. This is calculated by your employer using an IRS imputed income table and then reported on your W-2 tax form.

Imputed income is important to recognize since it is a fringe benefit. These are benefits, such as services, goods, or experiences, provided by an employer that are in addition to an employee's regular income. In the case of group-term life insurance, the IRS states that life insurance premiums for a policy of more than $50,000 are a fringe benefit and create taxable income for the employee.

As an employer, imputed income life insurance is important to note since this information must be included in your employees' W-2 tax forms. If it is not reported, you will be undervaluing the amount of taxes your employees must pay.

Employers must include this information on employee W-2 forms

Employers must include imputed life insurance information on employee W-2 forms. This is because, in the context of life insurance, imputed income refers to the value of the income tax the Internal Revenue Service (IRS) puts on group-term life insurance coverage provided by an employer when it exceeds $50,000. The IRS considers group-term life insurance provided by employers to be a tax-free benefit as long as the policy's death benefit is $50,000 or less.

However, when the death benefit exceeds this amount, there are tax implications. The portion of the benefit that surpasses the $50,000 threshold is treated as taxable income for the employee. This is important because, without this information, employees may end up underpaying their taxes. Therefore, employers must include this information on employee W-2 forms as taxable wages.

The amount of imputed income is determined by the employee's age and the IRS schedule. Employers can use the IRS Premium Table to calculate the imputed income value of the life insurance coverage over $50,000. This tax liability is then added to the employee's W-2 form at the end of the year. It is important to note that this information must be included in boxes 1, 3, 5, and 12 with code "C" on the W-2 form.

Additionally, employers have some flexibility in how often they report this information. They can choose to report it by pay period, by quarter, or on any other basis, as long as it is reported at least once per year and by December 31 of each year.

Calculations vary depending on the type of life insurance policy

Calculations for imputed life insurance vary depending on the type of life insurance policy. Imputed income is the value of the income tax the Internal Revenue Service (IRS) puts on group-term life insurance coverage in excess of $50,000. In other words, when the value of the premiums paid for by employers becomes too great, it must be treated as ordinary income for tax purposes.

The IRS considers group-term life insurance provided by an employer to be a tax-free benefit as long as the policy's death benefit is less than $50,000. There are no tax consequences if the group-term policy does not exceed $50,000 in coverage. However, there are tax implications if an employee is provided over $50,000 in life insurance coverage, and they pay less in premiums than the IRS has deemed the policy to be worth. In this case, the value of the life insurance policy, in excess of what an employee pays in premiums, is referred to as imputed income, which is subject to income taxes.

The calculation of imputed income depends on whether the policy is basic or voluntary. Basic group life insurance is paid for entirely by the employer, whereas, with voluntary life insurance, the employee pays part of the premium.

For example, consider a 54-year-old employee with $75,000 of life insurance coverage through a company-sponsored group life insurance plan. We can ignore the initial $50,000, leaving $25,000 of taxable coverage. According to the IRS table, the tax rate owed is $0.23 per $1,000. Therefore, the monthly imputed income is $5.75, and the annual imputed income is $69.

The calculation for a voluntary life insurance plan is almost the same, except the amount the employee pays for premiums is added to the yearly imputed income.

There are several other factors that affect life insurance rates. The amount of insurance purchased influences the policy cost, with higher coverage amounts leading to higher premiums. The type of policy also matters, with term policies generally being more affordable than permanent insurance. Additionally, the policyholder's age, health, occupation, hobbies, and habits can impact the rate, with older individuals and those engaged in risky activities or habits often facing higher premiums.

Life insurance calculators can help individuals estimate their coverage needs by considering factors such as annual income, years of income to cover, debts, future costs, savings, and existing life insurance coverage. However, it is recommended to work with a licensed agent or financial planner to ensure that the coverage level fits one's unique needs and circumstances.

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