What Does Code C on a W-2 Mean for Your Taxes?

The annual Wage and Tax Statement, Form W-2, is a document from an employer detailing wages earned and taxes withheld. This form contains various boxes and codes that communicate financial information to employees and the Internal Revenue Service (IRS). Box 12 reports different types of income, benefits, or contributions with special tax treatment. Understanding these codes is important for accurately filing a tax return and ensuring all income and benefits are properly accounted for.

Understanding the ‘C’ Code

Code ‘C’ in Box 12 of your W-2 indicates the taxable cost of employer-provided group-term life insurance coverage that exceeds $50,000. Group-term life insurance is a type of life insurance policy an employer offers to a group of employees, often as a benefit, without requiring individual medical exams. While the first $50,000 of coverage in such a plan is considered a tax-free benefit to the employee, any coverage provided above this threshold is treated as taxable non-cash compensation by the IRS.

This amount is referred to as “imputed income” because it represents a non-cash benefit the IRS considers taxable income. The employer reports this imputed income to ensure the value of this excess life insurance coverage is included in the employee’s overall taxable wages. This reporting helps both the employee and the IRS understand the composition of the total compensation package.

How the Amount is Determined

The taxable amount reported with Code ‘C’ is calculated based on a standardized valuation method set by the IRS, rather than the actual premium an employer might pay. This calculation uses a uniform premium table, often referred to as “Table I” rates, which assigns a cost per $1,000 of coverage based on the employee’s age. Employers use the employee’s age as of the last day of the tax year and the amount of coverage exceeding $50,000 to determine the monthly cost per $1,000 of coverage.

This standardized rate is multiplied by the number of $1,000 units of coverage above the $50,000 exclusion and adjusted for the number of months the coverage was in effect. If an employee had coverage for only part of a calendar month, the calculation involves prorating the monthly amount. This ensures a consistent and equitable method for valuing the taxable portion of the life insurance benefit across all employers.

Tax Impact of the ‘C’ Code

The amount displayed in Box 12 with Code ‘C’ has already been included in your taxable wages. This imputed income is added to the amounts reported in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages) of your W-2. You do not need to add this amount to your income again when preparing your tax return, as your employer has already accounted for it.

The separate reporting in Box 12 serves an informational purpose, detailing this non-cash benefit’s source that contributes to your overall taxable income. While the imputed income from group-term life insurance over $50,000 is subject to Social Security and Medicare taxes, it is not subject to federal income tax withholding. Employers are responsible for withholding and remitting the Social Security and Medicare taxes on this amount.

Verifying the Information

If you have questions or concerns about the amount reported with Code ‘C’ on your W-2, your employer’s human resources or payroll department is the primary resource for clarification. They can provide details regarding your specific group-term life insurance coverage and the calculation used for the imputed income. Review any benefits statements or plan documents you received concerning your life insurance policy to confirm the coverage amounts.

Should an error be identified on your W-2, your employer would need to issue a corrected Wage and Tax Statement, known as Form W-2c. This corrected form rectifies any inaccuracies in the wage and tax information previously reported. Employers file Form W-2c with the Social Security Administration and provide a copy to the employee as soon as possible after discovering an error.