What Is GTL on Your Paycheck and How Does It Affect Taxes?
Demystify GTL on your paycheck. Learn how employer-sponsored life insurance beyond a certain amount becomes a taxable benefit impacting your income.
Group Term Life (GTL) appearing on your paycheck represents a specific tax treatment for employer-provided life insurance coverage that exceeds a certain amount. Understanding GTL involves recognizing it as a taxable benefit provided by your employer, which impacts your overall compensation and tax obligations. Its presence on your pay stub signifies that a portion of your employer-sponsored life insurance is considered taxable income.
Understanding Group Term Life Insurance
Group Term Life insurance is a type of life insurance policy offered by an employer to a group of employees as part of their benefits package. This coverage provides a death benefit to designated beneficiaries if the employee passes away while covered by the policy. Coverage up to $50,000 is considered tax-free to the employee under Internal Revenue Code Section 79.
GTL appears on a paycheck when the employer-provided coverage exceeds this $50,000 tax-free threshold. Employers pay the premiums for this insurance, and employees do not directly contribute to the cost of the first $50,000 of coverage. This employer-paid benefit beyond the threshold triggers specific tax implications.
The Concept of Imputed Income
GTL appears on your paycheck due to the concept of “imputed income.” Imputed income refers to the cash value of non-cash benefits provided by an employer that the Internal Revenue Service (IRS) considers taxable income to the employee. Its value is treated as if you received cash for tax purposes.
This value is added to your gross taxable wages, making it an addition to your income rather than a deduction from your pay. The IRS views the value of employer-provided life insurance coverage exceeding $50,000 as a taxable benefit that must be assigned a cash value. You are not directly paying for the insurance itself through this line item; instead, you are being taxed on the monetary value of the benefit received above the tax-free limit. Just as the personal use of a company car has a taxable value, the excess GTL coverage is similarly valued and taxed.
Calculating Your Taxable GTL
The calculation of imputed income for GTL is determined by IRS regulations. Employers use the IRS Uniform Premium Table to ascertain the taxable value of the excess coverage. This table provides a cost per $1,000 of group term life insurance protection for one month, based on five-year age brackets.
Two factors influence this calculation: the amount of coverage that exceeds $50,000 and the employee’s age at the end of the tax year. To illustrate, if an employee has $75,000 in employer-provided GTL coverage, the first step is to subtract the $50,000 tax-free amount, leaving $25,000 as the excess coverage. This $25,000 is then divided by $1,000, and that result is multiplied by the applicable rate from the IRS table corresponding to the employee’s age bracket. For example, if the rate for a particular age group is $0.10 per $1,000 per month, the calculation for $25,000 of excess coverage would be ($25,000 / $1,000) $0.10 = $2.50 per month. This monthly amount is then totaled for the year to determine the annual taxable GTL.
How GTL Affects Your Taxes
The imputed income from GTL affects your tax obligations. This added amount increases your gross taxable wages, meaning it is subject to federal income tax. Additionally, it is subject to Social Security (FICA) and Medicare taxes. Because this imputed income elevates your overall taxable earnings, it will result in a higher tax withholding from your regular paychecks for these federal taxes.
While this increases your taxable income, it does not mean you are directly paying a premium for the insurance coverage. Instead, you are paying taxes on the value of a benefit you received from your employer. The total taxable GTL income for the year will be reported on your Form W-2. Specifically, this amount will be included in Box 1 and it will also be shown separately in Box 12 with code “C.” GTL is subject to federal income and FICA taxes, but its treatment for state income tax purposes can vary, so individuals may need to consider their specific state’s tax rules.