Key Points
– Employer-provided life insurance exceeding $50,000 is subject to taxation, with the excess coverage classified as imputed income by the IRS.
– Imputed income is reflected on the W-2 form, where the taxable part of employer-sponsored life insurance is reported as wages.
– Costs are age-dependent, with the IRS setting rates based on age to determine the taxable value.
Receiving life insurance through your workplace can be a valuable benefit, but there is a tax consideration that many overlook. If your employer offers life insurance coverage exceeding $50,000, the additional amount is deemed taxable income by the IRS, known as imputed income. While you are not directly paying for this coverage, it may slightly impact your tax liabilities. However, understanding this concept can prevent surprises and empower you to make informed decisions about your benefits.
What is Imputed Income?
Imputed income refers to non-monetary benefits provided by employers to employees, such as company-paid life insurance, gym memberships, or commuter perks, which the IRS considers as taxable income. Although you are not financially contributing to these benefits, they are included in your taxable earnings.
Regarding life insurance, if your employer supplies coverage exceeding $50,000, the portion above this threshold is deemed imputed income and is subject to taxation. This does not imply that you are paying for the insurance itself, but it may lead to a slight tax increase due to the IRS treating the extra coverage as an additional benefit.
As imputed income affects your tax liability, it is crucial to include it on your W-2 form. Failing to do so could result in underpaid taxes without your awareness.
The following table outlines the monthly taxable cost per $1,000 of coverage beyond the $50,000 limit, based on your age:
Age of the Insured
Monthly Taxable Income Cost per $1,000 of Excess Coverage
Under 25
$0.05
25-29
$0.06
30-34
$0.08
35-39
$0.09
40-44
$0.10
45-49
$0.15
50-54
$0.23
55-59
$0.43
60-64
$0.66
65-69
$1.27
70 and over
$2.06
Types of Imputed Income
Employers may offer various examples of imputed income to employees, including benefits like group term life insurance with coverage exceeding $50,000, use of a company vehicle, reimbursement for moving expenses, dependent care assistance above $5,000, education assistance exceeding $5,250, adoption assistance surpassing a specific threshold, gym memberships, and achievement awards. Notably, benefits like health insurance and health savings accounts are not classified as taxable income.
How Imputed Income Works in Life Insurance
Table and Your Age Adjustments for Life Insurance Premiums
If you choose to contribute to the premium of your life insurance policy, the taxable amount is reduced based on your contribution. The IRS table provided helps determine the monthly taxable cost per $1,000 of coverage that exceeds $50,000. Your employer will calculate this and include it in your taxable wages.
For example, let’s consider a 54-year-old employee with $75,000 of life insurance coverage through a company-sponsored group policy. After excluding the initial $50,000, the taxable coverage is $25,000. Following IRS rules, dividing $25,000 by $1,000 and referencing the IRS table reveals a tax rate of $0.23 per $1,000 for our 54-year-old employee, resulting in a monthly imputed income of $5.75.
Excess coverage: $75,000 excess death benefit – $50,000 coverage = $25,000
Monthly imputed income: ($25,000 / $1,000) x $0.23 = $5.75
Annual imputed income: $5.75 x 12 months = $69
At the end of the year, the employer will report $69 in the employee’s W-2 form as part of their taxable income. Imputed income can also apply to voluntary life insurance policies where the employee pays premiums, with calculations varying based on the premium amount impacting yearly imputed income.
For instance, let’s explore how imputed income is calculated for an employee who chooses supplemental voluntary life insurance coverage. Similar to the employer-paid example, but the employee’s premium payments reduce the taxable portion.
Suppose a 45-year-old employee has $50,000 in employer-paid coverage and buys an additional $50,000 in voluntary coverage, totaling $100,000. Since the initial $50,000 is exempt, only the remaining $50,000 is subject to imputed income calculations.
Excess coverage: $100,000 total coverage – $50,000 exclusion = $50,000 taxable coverage
IRS monthly rate for a 45-year-old: $0.15 per $1,000 of excess coverage
Monthly imputed income: ($50,000 / $1,000) x $0.15 = $7.50
Annual imputed income: $7.50 x 12 months = $90
If the employee contributes $5 monthly towards their premium, this amount is subtracted from the taxable imputed income.
Adjusted monthly imputed income: $7.50 – $5 = $2.50
Adjusted annual imputed income: $2.50 x 12 months = $30
Therefore, the employee’s taxable imputed income for the year would be $30, reflected on their W-2 form. Employees contributing more towards their voluntary life insurance plan will have a lower taxable imputed income.
Frequently Asked Questions:
What is the
Separate Policies from Your Employer
Are taxes owed on imputed income?
Yes, taxes must be paid on imputed income, unless it is considered exempt. The IRS mandates that fringe benefits, such as a group-term life insurance policy exceeding $50,000, be treated as taxable income. This income is subject to Social Security and Medicare taxes.
How is imputed income reflected in my paycheck?
Imputed income, which represents the value of taxable benefits provided by your employer, will be included in your gross wages. You may notice a distinct line on your paystub indicating imputed income.
How can imputed income be minimized?
Imputed income can be advantageous, encompassing additional benefits beyond your regular salary. To address potential tax consequences, consult the IRS chart to determine the taxable portion of your imputed income in advance, allowing for better financial planning.
Understanding Fringe Benefits
Employees often receive fringe benefits and alternative forms of compensation in addition to their base salary. These supplementary perks, known as fringe benefits, comprise paid time off, health insurance, company car usage, life insurance, childcare reimbursement, employee discounts, and stock options.
