Imputed income is the recognition of a benefit received but not paid for by the recipient. When it comes to life insurance, imputed income occurs when a person receives coverage through his or her employer but does not pay for it. The majority of the rules for imputed income are outlined in Internal Revenue Code 61.
Imputed income is taxable, but it is usually not subject to tax withholdings. It is, however, subject to FICA withholding for Social Security and Medicare taxes. This means that imputed income may result in tax consequences such as a reduction in the size of your tax refund or an increase in the size of the check you write to the IRS when filing your taxes.
What Is Imputed Income on My Wage Statement?
Employers will report imputed income in box 1 of form W-2. If box 12c on your W-2 is filled in, you are most likely receiving imputed income. Life insurance coverage over $50,000 and health insurance coverage provided to a non-marital spouse are two of the most common reasons for reporting imputed income. The imputed income is added to the employee’s taxable income for the year.
Why Is Group Term Life Insurance Coverage above $50,000 Taxable?
A group term life insurance plan paid for by an employer, or a plan in which some employees pay more for coverage and others pay less based on a specific table’s rates (more on that in the next section), generates imputed income for any death benefit above $50,000. Section 79 of the Internal Revenue Code declares death benefit coverage of less than $50,000 to be a de minimis benefit. In this case, the imputed income amount is the cost of the insurance provided by the employer for this fringe benefit.
How Is It Calculated?
Imputed income occurs when your employer either pays the entire cost of providing life insurance coverage or subsidizes the cost for some employees by charging other employees more for the coverage received compared to what the IRS Premium Table I reports as the cost for that age group. A straddle is a practice of subsidizing the cost of a life insurance policy for some plan participants against the premium table’s rates.
The imputed cost of coverage is the cost of providing the employee with the face amount of the coverage. It should be noted that if the employer does not cover the cost of the group life insurance coverage and each employee pays the full cost of the insurance, there is no imputed income.
Is it necessary for me to pay income taxes on imputed income?
Yes, imputed income counts as ordinary income from your employer, and you will be taxed on the amount received. The employer will handle the imputed income calculation and will report the income you received on your W-2 as part of your taxable wages. You will be in charge of calculating the amount of Federal Income Tax you owe on it as well as your other income.
Can the IRS seize a beneficiary’s life insurance policy?
The IRS does not always take a beneficiary’s life insurance. However, if you do not pay taxes on the imputed income you receive from your employer’s taxable fringe benefit, the entire death benefit payable to your beneficiary will be taxable. This is an extremely rare occurrence.
Income Imputed by Health Insurance
Imputed income also occurs when you provide health insurance benefits to a domestic partner. The imputed income in this case is the cost of the employer-subsidised premium.
For instance, if the health insurance plan has monthly premium payments totalling $800, but you pay $100 for the fringe benefit since your employer subsidies the remaining amount, you receive $700 in imputed income because the plan covers your domestic partner.