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.
Payroll Payments - Future Example:
Payroll Payments - Current Example:
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.
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. No further adjustments are necessary for Total Gross and Applicable Gross.
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.
Description = Can be added if desired.
Click Save.
The Medicare withholding must be paid. The Board will need to pay for both the Employee and Employer portion of Medicare. The employee can then reimburse the district - if desired. Create a Core>Adjustments for the Medicare Payroll Item using the Type of Amount Withheld and/or Board's Amount of payroll item. If Medicare is fully board paid, create a Core>Adjustments for the Medicare Payroll Item using the Type of Board Pickup Amount of Payroll Item. This adjustment will update both the Medicare pickup and Medicare on the W2. Another adjustment will need to be made to balance the 941 QTD Employer's Medicare Contribution using Type of Board's Amount of payroll item for this amount.
Use Core>Adjustments to manually add the employee Medicare amount withheld.
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.
Description = Can be added if desired.
Click Save.
Use Core>Adjustments to manually add the employer Medicare amount withheld.
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 employer withholding.
Description = Can be added if desired.
Click Save.
If Medicare is paid entirely by the Board (2.90% total).
Go to Core>Adjustments.
Click Create.
Employee - Find employee by typing in a few characters of first or last name.
Payroll Item - Choose Medicare Tax.
Type - Choose Board Pickup Amount of the Payroll Item.
Transaction Date - Enter or choose date from calendar.
Amount - Enter in the Board Pickup Amount of Medicare (1.45%) This will update both Medicare Pickup and Medicare on the employee's W2.
Description - Enter in a description (optional).
Click Save.
The software provides the ability to withhold city tax on non-cash earnings. City tax withholding is based on whether the Core>Payroll Item Configuration>Tax Non Cash Earn checkbox is marked or not marked. Keep in mind, city taxes may also need to be paid if the employee is not a resident of the city where the tax is deducted.
Medicare Adjustment Examples:
The employee pays the employee share (1.45%) and the board pays the board share (1.45%). The Life Insurance Premium cost is $100.00.
The Medicare amount would be calculated by $100.00 Life Insurance Premium Cost x 0.0145 = $1.45.
Core>Adjustments would need to be posted as follows:
Federal Tax Payroll Item - Using the Life Insurance Type for the Amount of $100.00..
Medicare Tax Payroll Item - Using the Amount Withheld Type and the Amount of $1.45.
Medicare Tax Payroll Item - Using the Board’s Amount of payroll Item and the Amount of $1.45.
The board pays the employee share (1.45%) and the board pays the board share (1.45%). The Life Insurance Premium cost is $100.00.
The Medicare amount would be calculated by $100.00 Life Insurance Premium Cost/ 98.55% = $101.47 Applicable Gross.
$101.47 x 0.029 (.0145 x 2) = $2.94 Medicare Pickup Amounts.
$1.47 for each the Employee (being paid by the board as pickup) and Employer amount.
$101.47 - $100.00 = $1.47 Applicable Gross Adjustment.
Core>Adjustments would need to be posted as follows:
Federal Tax Payroll Item - Using the Life Insurance Type for the Amount of $100.00.
Medicare Tax Payroll Item - Using the Applicable Gross Type for the Amount of $1.47. This will update both Medicare Pickup for $1.47 and Medicare for $1.47 on the Employee's W2.
Medicare Tax Payroll Item - Using the Board’s Pickup Amount Type and the Amount of $1.47. This will update the 941 Quarter report - QTD Employer's Medicare Contribution.
Medicare Tax Payroll Item - Using the Board’s Amount of payroll Item and the Amount of $1.47. This will update the employee's W2 Medicare Taxable Gross for Medicare.
A 'Difference in Adjusted Gross' will show for the NC1 payments on the Quarter Report.