What Is Basic Life Imputed Income and How Is It Taxed?

Many employers offer life insurance as a workplace benefit, but this perk can have tax implications. When a non-cash benefit has a taxable value, the Internal Revenue Service (IRS) refers to it as “imputed income.” This means that even though you are not receiving cash, the value of the benefit is added to your gross income for tax purposes. This concept applies to employer-provided group-term life insurance, where the value of coverage exceeding a certain threshold is considered imputed income and must be reported as part of your taxable wages.

Determining Taxable Life Insurance Coverage

The IRS allows the cost of the first $50,000 of employer-provided group-term life insurance coverage to be excluded from an employee’s income. This means the benefit is tax-free up to this limit. Any coverage amount that exceeds $50,000 is subject to taxation. The amount an employer pays for the policy’s premium does not directly determine the taxable amount; instead, the IRS uses its own method to calculate the value of the excess coverage.

To be eligible for this tax treatment, the policy must qualify as “group-term life insurance.” This means the insurance is provided to a group of employees, and coverage amounts are determined by a formula that precludes individual selection, such as a multiple of salary. All employer-provided term life insurance sources must be combined to determine if the total coverage exceeds the $50,000 threshold, as multiple policies are aggregated for this calculation.

Calculating the Imputed Income Amount

Calculating the amount of imputed income involves a multi-step process. The first step is to determine the total amount of group-term life insurance coverage your employer provides. From this total, you subtract the $50,000 tax-free portion to find the amount of excess coverage. For example, if you have $150,000 in coverage, the excess amount subject to tax is $100,000.

The next step requires you to divide this excess coverage amount by $1,000 to determine the number of insurance units. Using the previous example, $100,000 divided by $1,000 equals 100 units. You must then consult the IRS Uniform Premium Table, also known as Table I. This table provides the cost per $1,000 of protection for one month, with rates categorized by five-year age brackets. You must use your age as of the last day of the tax year to find the correct rate.

Once you have identified the appropriate rate from Table I, you multiply it by the number of insurance units. For instance, if a 42-year-old employee has 100 units of excess coverage, they would use the rate for the 40-44 age bracket, which is $0.10 per $1,000 of coverage. Multiplying 100 units by $0.10 gives a monthly taxable value of $10. To find the annual imputed income, this monthly value is multiplied by 12, resulting in $120 for the year. If an employee makes any after-tax contributions toward the premium, those payments can be subtracted from the annual calculated amount.

Reporting and Tax Consequences

The calculated annual imputed income is reported by your employer on your Form W-2, the Wage and Tax Statement. You will find this amount reported in Box 12, designated with the code “C.” This code identifies the taxable cost of group-term life insurance coverage over $50,000.

The amount shown in Box 12 with code “C” is also included in your total taxable wages. This means the imputed income figure is already factored into the amounts reported in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages) on your W-2. Because it is treated as part of your wages, the imputed income is subject to Social Security and Medicare taxes, collectively known as FICA taxes.

Your employer will withhold these FICA taxes from your regular paychecks throughout the year. The imputed income is also subject to federal income tax, and in most cases, state income tax. The inclusion of this non-cash benefit in your taxable income increases your overall tax liability.