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Calculating the imputed taxable income for group life insurance is a
real pain for companies that do not have good payroll software
or payroll service. CPAdvantage.com eases this pain and
administrative burden with a free group life insurance imputed taxable income
calculator.
What is IRC Sec 79?
Section 79 of the Internal Revenue Code (IRC) requires that employers
calculate imputed taxable income for employees that receive group life insurance
coverage in excess of $50,000. The amount of imputed taxable income must
be reported on the employee's Form W-2. The IRC Section 79 allows
employees to exclude up to $50,000 from taxable income.
Before we start, lets review a key concept. The premise behind this
calculation is that the US Tax Code wants employees to pay taxes on what
they consider the value of group life insurance in excess of
$50,000. For example, if you have $85,000 of group life insurance coverage
paid for by the employer. An employer would have to calculate the value of
this benefit to the employee. In this case, the excess coverage would be
$35,000 (85,000 - 50,000). This does not mean that an employee will pay
taxes on an additional $35,000 of taxable income. It means the employee
will pay taxes on the value of the $35,000 group life benefit.
In order to calculate the imputed taxable income for an employee, the
employer must use the following table as prescribed by the Internal Revenue
Service. When using this table and calculating the imputed taxable income,
it is important to note that you must use the age of the employee as of the last
day of the calendar year.
|
Age of Employee |
Monthly cost per $1,000 of Excess Coverage |
| Under 25 |
$.05 |
| 25 to 29 |
.06 |
| 30 to 34 |
.08 |
| 35 to 39 |
.09 |
| 40 to 44 |
.10 |
| 45 to 49 |
.15 |
| 50 to 54 |
.23 |
| 55 to 59 |
.43 |
| 60 to 64 |
.66 |
| 65 to 69 |
1.27 |
| 70 and over |
2.06 |
|
Age of Employee |
Monthly cost per $1,000 of Excess Coverage |
How the calculation works
As noted earlier, determine the age of the employee as of the last day in the
calendar year. The next step is to determine the amount of total
coverage. The amount of total coverage should include any supplemental
coverage paid for by the employee. When determining the amount of
total coverage, you will probably notice that the amount of total
coverage will change over a period of a year. The primary reasons
why the amount of total coverage changes during a year are:
-
Adjustments in pay
-
Changes in the amount of supplemental insurance coverage
Since the total amount of coverage will most likely change throughout a calendar
year, you will have to identify the periods of coverage and impute taxable
income for each period. For example, an employee is hired on 02/01/2000
at $75,000 per year. On 07/01/2000, this same employee received a $10,000
raise. The employer pays for the group life insurance equal to one
times earnings. This means in order to calculate the value of the excess
total coverage, an employee will have to calculate the value of this benefit
over two periods of coverage. The first period of coverage is from
02/01/2000 - 06/30/2000 (Total Coverage $75,000). The second period of
coverage is from 07/01/2000 - 12/31/2000 (Total Coverage $85,000)
After determining the amount of excess coverage over $50,000 for a period,
divide the excess coverage by $1,000 (rounded to nearest
tenth). Multiply the result by the appropriate rate (i.e., according
to age) in the IRS table above. The result of this calculation is the
unadjusted imputed taxable income.
If the employee does not contribute funds to the total coverage amount for
the period, then the unadjusted imputed taxable income will be the total
imputed taxable income for that period. If the employee contributes
funds to the cost of total coverage, then those contributions will
reduce the amount of imputed taxable income for that period.
If an employee's contribution (i.e., premium) is deducted from pay before taxes
(pre-tax contribution), then the IRS considers the amount paid as an
employer paid contribution. This means that the amount in Step 3 below
would be zero.
If an employee's contribution (i.e., premium) is deducted from pay after taxes,
then the amount per period of coverage is subtracted from unadjusted imputed
taxable income (i.e, Step 4 Below).
Calculation Example - For Each Period of Coverage
Step One - Calculate total insurance coverage over $50,000
Basic Life Insurance + Supplementary Insurance - $50,000 = E
Step Two - Determine imputed taxable income on total insurance coverage
over $50,000
E * Rate per $1,000 * Months Covered = T
Step Three - Determine employee contributions
C
Step Four - Calculated imputed taxable income
T - C = Imputed Taxable Income
If the result is negative or zero, then the employee is not subject to imputed
taxable income.
For your convenience, here is a free
Section 79 calculator.
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