How to Calculate the Imputed Value of Life Insurance

The imputed value of a life insurance policy is reported to the IRS as taxable income.

According to Section 79 of the Internal Revenue Code, when an employer provides term life insurance to an employee as a fringe benefit, the cost for coverage in excess of $50,000 is reported as taxable income. The taxable value of this policy, also known as its imputed value, is reported on an employee's W-2 form for each year that the policy is provided as a benefit. It is important for an employer to know how to correctly calculate the imputed value of a term life policy because the IRS can assess a penalty of $50 for each incorrectly filed W-2.

Things You'll Need

• Computer
• Internet connection
• Calculator

Instructions

1. Obtain a copy of IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits. Go to the IRS website, Irs.gov, enter "15-B" into the search field in the top right corner and then click "Search." The current version of Publication 15-B should be the first search result that appears.  Print the section titled "Group-Term Life Insurance Coverage."

2. Subtract $50,000 from the face value of your employer-provided term life policy to determine the taxable amount. For instance, if the policy has a face value of $75,000, the taxable amount would be $25,000 ($75,000 minus $50,000).

3. Divide the taxable amount by 1,000. For example, $25,000 divided by 1,000 equals $25.

4. Multiply your answer to Step 3 by the applicable rate found in the "Cost Per $1000 of Protection for 1 Month" table found in IRS Publication 15-B. The table is broken down into five-year age brackets, with each bracket having its own cost per $1,000. Using the same figures as above for a 55-year-old employee, you would multiply $25 by .43 to get a monthly cost of $10.75.

5. Multiply your answer to Step 4 by the number of months during the tax year that coverage was provided for the employee to get the unadjusted imputed taxable income. For example, if the monthly cost is $10.75 and the employee worked all 12 months of the tax year, the unadjusted imputed taxable income would be $129.

6. Subtract the employee's yearly after-tax contributions to the policy from your answer to Step 5 to get the imputed value of the policy. Report this amount in Boxes 1 and 16 of the employee's W-2 form.

References

• IRS: Publication 15-B, Employer's Tax Guide to Fringe Benefits
• IRS: Group-Term Life Insurance
• Cornell University Law School: Internal Revenue Code Section 79
• IRS: General Instructions for Forms W-2 and W-3