Question: Part of the premium for employer provided group-term life insurance is subject to withholding for Social Security and Medicare taxes. Is it also taxable for federal unemployment tax or additional Medicare tax purposes?
Answer: In general, the fair market value of any employer provided fringe benefit is taxable for all tax purposes unless explicitly excluded by statute. Several sections of the Internal Revenue Code cover exemption and taxation of employer provided group-term life insurance.
Under IRC §79, the cost of up to $50,000 of group-term life insurance plus any amount the employee pays for coverage under the plan is excluded from wages for income tax purposes. The cost of the coverage over the excluded amount is included in taxable wages. However, the amount included in income is exempt from withholding under IRC §3401(a)(14).
For example, a 46-year-old employee has $200,000 of coverage under an employer-provided group-term life insurance plan. The imputed cost is determined using Table 2-2, Cost per $1,000 of Protection for 1 Month, found in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
In 2023, the table value for a 45- to 49-year-old employee is 15 cents per month per $1,000 of protection. The annual cost for $200,000 is $360. The employee makes an after-tax contribution of $100 for the coverage. The amount excluded from gross pay is the $90 cost of $50,000 plus the $100 employee contribution. The excess cost of $170 is included in the employee’s gross wages but is exempt from income tax withholding.
IRC §3121(a)(2)(C) provides that the portion of the cost of group-term life insurance that is included in gross income for income tax purposes is included in Social Security and Medicare wages. In the example, the $170 excess cost is included in Social Security and Medicare wages and employee taxes are withheld. The employer also pays its share of the taxes.
The additional Medicare tax applies when the employee’s gross income from employment exceeds $200,000. The definition of employment is the same as that for Medicare as provided in IRC §3121(b).
Once the $200,000 threshold is reached, the employer is to withhold 0.9% of the gross income from employment exceeding the $200,000 threshold. Like income tax withholding, this is a credit that applies to cover the employee’s actual tax liability as determined on the employee’s tax return and can be refundable. The exclusion for group-term life insurance is already factored into Medicare wages so is not an adjustment to additional Medicare tax wages.
IRC §3306(b)(2)(6) excludes the cost of employer provided group-term life insurance from federal unemployment tax. The value of the benefit is not included in taxable FUTA wages on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Dependent life insurance is not covered under IRC §79, but the same valuation rules apply. If the death benefit does not exceed $2,000 for the employee’s spouse or dependent, then the benefit is considered de minimis and is not taxable. However, if the death benefit exceeds $2,000, the cost is imputed from the IRS table on the face value using the insured’s age rather than the employee’s age.
For former employees, the taxable amount of the group-term life insurance benefit is reported as wages on Form W-2, Wage and Tax Statement. The amount of Social Security tax and Medicare tax that was not withheld is reported in Box 12. These tax amounts are added to the former employee’s tax liability on the employee’s individual income tax return. This reporting should not be used for current employees even if they have no cash wages from which to withhold tax. The employer must either recover the taxes from the employee or gross up additional income for the employee for the employer-paid taxes.
This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.
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