The Group-Term Life Insurance over $50k is being taxed with FICA taxes plus Federal Income Taxes.

Customers are confused why the Group-Term Life Insuranceover $50,000 is being taxed with FICA taxes plus Personal Income tax by thesystem when they process a paycheck with this Payroll item. Customers claimthat based on IRS Publication 15-B, it should only be subject to FICA taxes.Some customers are confused with this IRS ruling on the taxability of theGroup-Term Life Insurance over $50,000 Payroll item and why the system behavesin the way it is now.
 
Let the customer know that are no tax consequences if the total amount of suchpolicies does not exceed $50,000. The imputed cost of coverage in excess of$50,000 must be included in income, using the IRS Premium Table, and aresubject to social security and Medicare taxes.

Because the employer is affecting the premium costthrough its subsidizing and/or redistributing role, there is a benefit toemployees. This benefit is taxable even if the employees are paying the fullcost they are charged. You must calculate the taxable portion of the premiumsfor coverage that exceeds $50,000.
 
To illustrate: The employer of Employee A provides him with a Group-Term LifeInsurance coverage of $200,000. Employee A is 45 years old, is not a keyemployee and pays $100 per year toward the cost of the insurance. Employee A'semployer must include $170 in his wages. The $200,000 of insurance coverage isreduced by $50,000. The yearly cost of $150,000 of coverage is $270 ($.15 x 150x 12) and is reduced by the $100 Employee A pays for the insurance. Theemployer includes $170 in boxes 1, 3, 5 of Employee A's Form W-2. The employeralso enters $170 in box 12 with Code C.
 
Notes:
1. Please see https://www.irs.gov/Government-Entities/Federal,-State-&-Local-Governments/Group-Term-Life-Insurance
2. You may refer to Table 2-2 on page 12 to understand how the $.15 in theillustration was computed

Disclaimer : This article is written with the undertakingthat tax rules and laws are constantly changing and the topic is updated at thepublish date. 

 

 

 

We are not providing tax consulting.  For the most current information, pleasecontact your accountant/tax consultant, call the tax agency or visit the stateofficial website.