When your employer offers you group term life insurance, it is considered a tax-free benefit as long as the death payout remains at $50,000 or less. However, when the value of the term life insurance payout becomes greater than $50,000, the IRS requires the employee to report it as income. Once the payout is considered income, it has tax implications for the employee. Although imputed income includes benefits that aren’t part of an employee’s direct monetary compensation, there are ways you can calculate the amount for yourself.
What is imputed income?
Generally speaking, imputed income includes the benefits an employee receives that are not part of their salary and wages. But these benefits are still taxed as part of an employee’s income. While the employee may not have to pay for these benefits and services, they might have to pay taxes on them, no matter the benefits’ monetary value. You might hear these referred to as fringe benefits with some companies.
It is important to understand the impact imputed income has on employees’ taxes. This amount needs to be included in an employee’s W-2. Without this information, the employee may end up underpaying on taxes if imputed income was not included.
The table below shows how the IRS breaks down the monthly taxable income cost per $1,000 of excess coverage. This is for coverage above and beyond the $50,000 death payout of term life insurance.
|Age of insured||Monthly taxable income cost per $1,000 of excess coverage|
|70 and over||$2.06|
Types of imputed income
There are several examples of imputed income an employer may offer. Examples might include:
- Group term life insurance with coverage in excess of $50,000 death benefit
- Use of a company vehicle
- Moving expenses reimbursement
- Dependent care assistance greater than $5,000 in value
- Education assistance higher than $5,250
- Adoption assistance if it exceeds a certain threshold
While these are examples of benefits that are considered imputed income, some popular benefits such as health insurance and health savings accounts do not fall into the category of taxable income.
How does imputed income work in life insurance?
The IRS considers the amount above a $50,000 group term life insurance death payout to be a form of imputed income. Because of this, there are tax implications for the employer and the taxable income must be reported. It is then reported on a W-2 form as taxable wages. The IRS has created the table (located above) to show the tax cost based on the employee’s age.
How to calculate imputed income
Fortunately for employees, the imputed income from a group term life insurance policy exceeding $50,000 is relatively straightforward to calculate. The biggest factor an employee needs to understand is if the life insurance is considered a basic plan, where the employer pays the entire cost of the term life insurance. The policy could also be a voluntary life insurance plan, where the employee pays for part of the term life insurance policy. This would make a difference in how you calculate the amount.
Example with a basic life insurance plan
Imagine an employee is currently 40 years old and has been issued a basic life insurance plan for $100,000. Based on the IRS table, you would assess $0.10 per each $1,000 in excess of $50,000. In this example, the death benefit totals $100,000:
- Excess coverage: $100,000 excess death benefit – $50,000 coverage = $50,000
- Monthly imputed income: ($50,000 / $1,000) x .10 = $5
- Annual imputed income: $5 x 12 months = $60 imputed income
At the close of the year, the employer would include $60 in this employee’s W-2 form.
The calculation is almost the same when you have a voluntary life insurance plan, where the employee pays premiums for the policy. The difference is that the amount the employee pays for premiums is added to the yearly imputed income.
Frequently asked questions
What is the best group-term life insurance?
Group term life insurance is typically a benefit offered by your employer, but there may be options for you to make additional purchases. When deciding if you should stay with the group term life insurance offered or seek an option elsewhere, it’s important to keep in mind a few key details. Check to see what the amount of the premiums will cost you (if anything) and if the policy is portable in case you leave the job. You should also confirm the death payout to determine if it would be enough to take care of your family’s needs should the unexpected happen.
Do you have to pay taxes on imputed income?
Yes, you do. Unless it is something considered exempt, the IRS requires fringe benefits, such as a group-term life insurance policy in excess of $50,000, to be considered taxable income. It will be subject to Social Security and Medicare taxes.
Is imputed income included on my paycheck?
Since imputed income is the value of the benefits provided by your employer that is considered taxable income, it will be reported in your gross wages. You may see a separate line in your paystub for imputed income.
Who pays imputed income?
Imputed income refers to the value of the benefits provided by the employer. However, the employee is responsible for paying taxes on the imputed income. The imputed income is included in your gross wages by your employer.