If you provide group-term life insurance to your employees, you might need to think about imputed income. It applies whenever you provide an employee more than $50,000 worth of life insurance. So what is it, and how does it work?
You’re probably familiar with the concept of providing pre-tax benefits to your employees, such as health coverage. Usually, these benefits are going to be tax exempt. But sometimes, the IRS considers the benefit to be taxable.
What is imputed income?
Let’s use an over-simplified example. Imagine that an employee, after getting their paycheck, purchased life insurance for $120/year. Ordinarily, the employee would have already paid taxes on that $120, because they were withheld from their paycheck. But what if instead, the employer paid for that insurance for them?
In the eyes of the IRS, that $120 that the company paid might actually be income to the employee, even though the money never made it into their bank account. And as a result, both the employer and the employee needs to pay taxes on that money. This is what we refer to as imputed income: it’s money that wasn’t actually income, but it is regarded as income (and thus imputed to the employee).
But it’s a little more complicated than that. If you provide life insurance that is $50,000 or less, everything is usually tax-free. For the exceptions, check out the IRS guidance for 2017.
How is imputed income calculated?
To calculate imputed income for group-term life insurance, the IRS has a specific formula you should use. We’ve broken it out into a few easy steps:
- Take the employee’s coverage amount, and subtract $50,000. This gives you the excess amount. Example: Tom’s employer provides him $200,000 of coverage, so the excess amount is $150,000.
- Divide the excess amount by 1000, and then multiple it by the monthly cost for 2017, according to the price table. Use the employee’s age at the end of the tax year; this gives you the monthly cost. Example: Tom is 45 years old, so his monthly cost is $22.50.
Age Cost per $1000 Under 25 $0.05 25 through 29 $0.06 30 through 34 $0.08 35 through 39 $0.09 40 through 44 $0.10 45 through 49 $0.15 50 through 54 $0.23 55 through 59 $0.43 60 through 64 $0.66 65 through 69 $1.27 70 and older $2.06
* These values are for the *2019* tax year. For the most up-to-date value, see the Employer’s Tax Guide to Fringe Benefits.
- If the employee is paying for any of the insurance costs themselves, subtract it off. This gives you the monthly imputed income amount. A special note is that if there are any partial months involved, you’ll need to prorate the amount. The IRS guidance here doesn’t specify a particular method for prorating. Example: Tom pays $10 per month toward the insurance costs, so his monthly imputed income is $12.50.
How is imputed income taxed?
Imputed income is subject to both Medicare and social security taxes, as well as federal income tax. So when you provide an employee with their W-2 at the end of the year, it needs to be included in boxes 1, 3, and 5. You also should include the total amount of imputed income in box 12, with code “C”.
Should you put imputed income on employee paystubs?
Many payroll systems will allow you to include imputed income on your employees’ paystubs, and they will also automatically calculate any tax withholdings. If your payroll provider supports this feature, it’s a good idea to use it, so that you can be transparent with your employees.
Where can I see it in GoCo?
When your employees enroll in benefits, GoCo will automatically calculate their payroll deductions, as well as their imputed income. This information is displayed on the Payroll Dashboard:
- Go to Company from the left-hand menu, then click Manage on the Payroll card
- Click on the particular pay period you’re interested in
- Click the Audit button on the top right corner, and turn off the option to Show Only Changes
- Scroll to the right until you see the Group Life Imputed Income column in the table.