Many companies provide employer paid group-term life insurance policies when employees sign on to become full-time. What these employers may not realize is that there is a limit to the benefit amount they can provide without tax implications. The IRS states that the first $50,000 of employer paid life insurance is tax-free. However, any employer paid benefit over $50,000 is considered imputed income and therefore is taxed as such. The IRS determines the amount an individual must pay based on their age and the dollar amount that exceeds $50,000. You can see this imputed income chart below:
In order to contextualize this information, we will use Mary as an example. Mary’s plan provides coverage of 2x the salary to $200,000 maximum for all employees. At the end of 2019, Mary was 38 years old. During that year, she made $100,000. This is how she would find her taxable income:
|Life amount over $50,000||= $150,000|
|Rate (based on age 38)||= .09|
|Times the number of months||= 12|
|Taxable Income||= $162.00|
As you can see above, Mary earned $100,000 salary for the year. Her coverage permits 2x her salary, so her life insurance covered $200,000 for that year. Because only the first $50,000 of her income is not taxable, she must subtract $50,000 from $200,000 to yield $150,000. From there, she would find her age in the first table and see her age rate is $.09. Finally she would multiply her $150,000 x .09 x 12 months = $162. This amount is the taxable income that she must pay.
**This is only a guide, please discuss your taxable income further with your tax attorney**