Reporting Taxable Portion of Life Insurance on the Employee's W2
- Former user (Deleted)
- Lori Nye
- Lori Miller
According to the Internal Revenue Service, the cost of group-term life insurance an employer provides to an employee for coverage over $50,000 is to be included in the wages reported for the employee. Per the IRS guidelines this amount is subject to withholding for Social Security and Medicare, but not income tax. The cost is generally determined by using the uniform premium rates provided by the IRS. These rates set the cost of each $1000.00 of group-term life insurance for each month, according to the employee's age. Click here for more information from the IRS regarding Group-Term Life Insurance and related costs.
Processing Taxable Portion of Life Insurance Steps
The following steps will ensure that the proper amounts will be taxed and placed on the W2 forms.
Calculate the taxable portion of life insurance premium amount that needs to be reported on the employee’s W2.
Calculate the excess life insurance coverage provided above the $50,000 limit.
Life Insurance Amount Provided - $50,000.00.
The IRS provides the cost per $1,000.00 of coverage. Use the excess life insurance coverage amount calculated above to determine the cost per $1,000.00.
Value calculated in Step 1a/$1,000.00.
Using the IRS Publication 15-B (Table 2-2) and the age of the employee, locate the cost per $1,000.00.
Cost located in Publication 15-B X Value calculated Step 1b.
Annual cost is calculated by the value calculated in Step 1c X Number of months the life insurance coverage was in effect.
Cost to be reported on the employee’s W2 is calculated by the Annual cost calculated in Step 1d X Step 1b.
Example: A 35 year old employee receives $250,000.00 of board paid group term life insurance for an entire calendar year.
Excess life insurance coverage provided = $250,000.00 - $50,000.00 = $200,000.000.
Calculated excess life insurance coverage per $1,000.00 of coverage = $200,000.00/$1,000.000 = 200.
IRS Publication 15-B, Table 2-2, cost per $1,000.00 = $0.09.
Annual Cost = $0.09 X 12 = $1.08.
Amount that needs to be reported on the employee’s W2 = $1.08 X 200 = $216.00.
Include the calculated amount in Step 1 on the employee’s W2.
Process the Life Insurance Premium Taxable Amount as Part of a Payroll within the Calendar Year:
If there are remaining payrolls to be processed in the calendar year, the Life Insurance Pay Type can be used.
Go to Payroll>Payroll Payments - Current or Payroll Payments - Future.
Click Create.
Employee - Select the appropriate employee from the dropdown.
Compensation - Select the appropriate compensation from the dropdown.
Description - Life Insurance.
Pay Type - Life Insurance Premium.
Effective Date - Leave blank if wanting to be processed the next payroll processed. Otherwise enter a date inclusive of the pay period beginning and ending dates of the payroll you want the payment to be included in.
Units - 1.
Rate - Enter the calculated life insurance taxable amount.
Applies For Retirement - Uncheck the checkbox.
Retire Hours - Leave blank.
Supplemental - Leave unchecked.
Supplemental Tax Option - None.
Click Save.
Complete the payroll process.
Examples:
Payroll Payments - Future:
Payroll Payments - Current:
This pay type will be treated taxed according to the Federal rules and as follows:
Federal Tax, State Tax, or OSDI withholdings will not be withheld.
Medicare or Social Security withholdings will be calculated will be calculated when the payroll is initialized.
City withholdings are based on how the Payroll Item Configuration>Tax Non Cash checkbox is marked.
If the Core>Payroll Item Configuration>Tax Non Cash Earn is checked and the Life Insurance Pay Type is processed through payroll or an Adjustment>Life Insurance is created, the City Total Gross and Applicable Gross are increased by the Life Insurance amount, the city tax is paid when the employee files their taxes.
If the Core>Payroll Item Configuration>Tax Non Cash Earn is not checked and the Life Insurance Pay Type is processed through payroll or an Adjustment>Life Insurance is created, the City Total Gross and Applicable Gross are not increased by the Life Insurance amount.
Effects of the Life Insurance Premium Pay Type on various reports:
Not included in the Report Summary>Total Gross on the Pay Report.
Included in the Pay Type Totals>Life Insurance Premium Total on the Pay Report.
Included in the Grand Totals>All Pay total on the Pay Amount Summary Report.
Included in the Grand Totals>Other Pay total on the Pay Amount Summary Report.
Included in the Adjusted Gross on the payment details.
Included in the Federal Total Gross and Taxable Gross, State Total and Taxable Gross, City Total Gross and Taxable Gross if the Payroll Item Configuration>Tax Non Cash checkbox is marked (if applicable), Medicare Total Gross and Taxable Gross, and OSDI Total Gross and Taxable Gross (if applicable) on the W2 Report/Submission/Forms. If the employee has Medicare pickup, the Medicare pickup is correctly calculated and the amount withheld for Medicare pickup is included in the Federal Total Gross and Taxable Gross, State Total and Taxable Gross, City Total Gross and Taxable Gross if the Payroll Item Configuration>Tax Non Cash checkbox is marked (if applicable), Medicare Total Gross and Taxable Gross, and OSDI Total Gross and Taxable Gross (if applicable) on the W2 Report/Submission/Forms.
Process the Life Insurance Premium Taxable Amount as a Core>Adjustments:
If the Life Insurance Premium Pay Type was not used prior to the last pay of the calendar year, a Core>Adjustments using the Type of Life Insurance for the calculated taxable cost must be created. The Life Insurance Adjustment will automatically update the Total Gross and Applicable Gross on the Federal Tax, Ohio State Tax, City (if applicable), Medicare Payroll Items, and OSDI (if applicable). No further adjustments are necessary for Total Gross and Applicable Gross - unless the employee has Medicare pickup.
The Medicare (both the employee amount and board amount) owed for the life insurance benefit will need to be paid. In most cases, the Board pays both the employee and board amounts that are owed and the employee can then reimburse the district - if desired. The Core>Adjustments required depend on the how the Medicare Payroll Item record is set up - meaning regular Medicare (the employee is responsible for paying their 1.45% and the board pays 1.45%) or Medicare pickup (the board pays for the employee share (1.45%) and the board share (1.45%)).
Regular Medicare:
The employee Medicare amount is being paid by the employee (1.45%) and board Medicare amount is being paid by the board (1.45%):
Life Insurance Premium cost is $100.00. The Medicare amount would be calculated by $100.00 Life Insurance Premium Cost x 0.0145 = $2.90 Total Medicare or $1.45 for the employee amount and $1.45 for the board amount.
The following Core>Adjustments would need to be posted:
Go to Core>Adjustments.
Click Create.
Employee = Locate the employee by name or id.
Payroll Item = Federal Tax.
Type = Life Insurance.
Transaction Date = Enter a date within the current posting period.
Amount = Enter the calculated taxable amount of life insurance - ($100.00 in this example)
Description = Can be added if desired.
Click Save.
Click Create.
Employee = Locate the employee by name or id.
Payroll Item = Medicare Tax.
Type = Amount Withheld.
Transaction Date = Enter a date within the current posting period.
Amount = Enter the amount of owed for the employee withholding - ($1.45 in this example).
Description = Can be added if desired.
Click Save.
Click Create.
Employee = Locate the employee by name or id.
Payroll Item = Medicare Tax.
Type = Board’s Amount of payroll item.
Transaction Date = Enter a date within the current posting period.
Amount = Enter the amount of owed for the board withholding - ($1.45 in this example).
Description = Can be added if desired.
Click Save.
Effects of the Life Insurance and Medicare Adjustments to the Quarter Report:
Life Insurance Adjustment on the Federal Tax Payroll Item -($100.00 in this example).
Totals Summary>Non-Cash Earnings
Form 941 Line 2) QTD Taxable x 1
Form 941 Line 5C) QTD Medicare Taxable Wages x 1
Amount Withheld Adjustment on the Medicare Tax Payroll Item - ($1.45 in this example).
Form 941 Line 5C) QTD Employee’s Medicare Contributions x 1
Form 941 Line 13) Federal Withholding Deposits x 1
Board’s Amount of payroll item on the Medicare Tax Payroll Item - ($1.45 in this example).
Form 941 Line 5C) QTD Employer’s Medicare Contributions x 1
Form 941 Line 13) Federal Withholding Deposits x 1
Medicare Pickup:
The employee Medicare amount is being paid by the board (1.45%) and the board amount of Medicare is being paid by the board (1.45%):
Life Insurance Premium cost is $100.00. The Medicare amount would be calculated by the first calculating the Applicable Gross. Then calculating the Medicare withholding amount based on the calculated Applicable Gross.
Applicable Gross = Life Insurance Amount/98.55% - ($100.00/98.55% = $101.47 in this example).
Medicare Amount = Calculated Applicable Gross X 0.029 (0.0145 X 2) - ($101.47 X 0.029 = $2.94 or $1.47 for the employee amount paid by the board and $1.47 for the board amount in this example).
The following Core>Adjustments need to be posted:
Go to Core>Adjustments.
Click Create.
Employee = Locate the employee by name or id.
Payroll Item = Federal Tax.
Type = Life Insurance.
Transaction Date = Enter a date within the current posting period.
Amount = Enter the calculated taxable amount of life insurance - ($100.00 in this example).
Description = Can be added if desired.
Click Save.
Click Create.
Employee - Find employee by typing in a few characters of first or last name.
Payroll Item - Choose Medicare Tax.
Type - Choose Board’s Pickup Amount of payroll item.
Transaction Date - Enter or choose date from calendar.
Amount - Enter the calculated employee withholding being paid by the board. This amount will be included in the Medicare Pickup total and the Medicare Tax Withheld total on the employee's W2 - ($1.47 in this example).
Description - Enter in a description (optional).
Click Save.
Click Create.
Employee = Locate the employee by name or id.
Payroll Item = Medicare Tax.
Type = Board’s Amount of payroll item.
Transaction Date = Enter a date within the current posting period.
Amount = Enter the calculated board withholding - ($1.47 in this example).
Description = Can be added if desired.
Click Save.
Click Create.
Employee - Find employee by typing in a few characters of first or last name.
Payroll Item - Choose Medicare Tax.
Type - Choose Applicable Gross.
Transaction Date - Enter or choose date from calendar.
Amount - Enter the amount of the difference in the original Applicable Gross - calculated Applicable Gross - ($101.47 - $100.00 = $1.47 in this example).
Description - Enter in a description (optional).
Click Save.
This adjustment will be treated as follows:
City withholdings are based on how the Payroll Item Configuration>Tax Non Cash checkbox is marked.
If the Core>Payroll Item Configuration>Tax Non Cash Earn is checked and the Life Insurance Pay Type is processed through payroll or an Adjustment>Life Insurance is created, the City Total Gross and Applicable Gross are increased by the Life Insurance amount, the city tax is paid when the employee files their taxes.
If the Core>Payroll Item Configuration>Tax Non Cash Earn is not checked and the Life Insurance Pay Type is processed through payroll or an Adjustment>Life Insurance is created, the City Total Gross and Applicable Gross are not increased by the Life Insurance amount.
OSDI withholdings are based on the following:
When the Life Insurance Adjustment is added, each OSDI Payroll Items>Applicable Gross is increased by the life insurance adjustment amount. If an employee lived in multiple school districts throughout the year, the Applicable Gross for each OSDI Payroll Item will need to be calculated and Core>Adjustments will need to be created so each OSDI's Applicable Gross is correct. The Applicable Gross for each OSDI Payroll Item is calculated by the following:
Cost Per Month = Total Life Insurance Amount/Number of Months the Employee Had the Life Insurance.
Cost Per Month X Total Months in School District.
To create the necessary Core>Adjustments, do the following:
Click Create.
Employee = Locate the employee by name or id.
Payroll Item = Medicare Tax.
Type = Board Amount of Payroll Item.
Transaction Date = Enter a date within the current posting period.
Amount = Enter the amount of owed for the board withholding.
Description = Can be added if desired.
Click Save.
Effects of the Life Insurance and Medicare Adjustments to the Quarter Report:
Life Insurance Adjustment on the Federal Tax Payroll Item -($100.00 in this example).
Totals Summary
A 'Difference in Adjusted Gross' will show for the NC1 payments on the Quarter Report.
Line 2) QTD Taxable Wages x 1
Line 5C) QTD Medicare Taxable Wages x 1
Board’s Pickup Amount Adjustment on the Medicare Tax Payroll Item - ($1.47 in this example).
Line 2) QTD Taxable Wages x 1
Line 5C) QTD Employees' Medicare Contributions x 1
Line 13) Federal Withholding Deposits x 1
Includes Board paid Medicare/FICA x 1
Picked up by board x 1
Board’s Amount of payroll item on the Medicare Tax Payroll Item - ($1.47 in this example).
Updates to the Quarter Report:
Line 2) QTD Taxable Wages x 1
Line 5C) QTD Employees' Medicare Contributions x 1
Line 13) Federal Withholding Deposits x 1
Includes Board paid Medicare/FICA x 1
Picked up by board x 1
