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Texas Payroll/Personnel Resource

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Tax Information
Imputed Income

Background

A taxable fringe benefit arises when coverage for group-term life insurance exceeds $50,000 and the policy is carried directly or indirectly by the employer.

After the end of the calendar (or tax) year, agencies must report wage and tax information to the Internal Revenue Service (IRS) and the Social Security Administration (SSA) as part of the W-2 process. The IRS and SSA define what information must be reported. All W-2 reports identify the amount of taxable wages paid to each employee, as well as the amount of taxes withheld and remitted to the IRS. Employees receive a copy of this report.

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Details

Imputed income is the cost of group-term life insurance coverage over $50,000 provided directly or indirectly by an employer.

Imputed income occurs when:

  • Employees pay less for the coverage than the Internal Revenue Service (IRS) has determined it to be worth, and
  • The individual’s employer directly or indirectly pays for the coverage over $50,000.

Imputed income is not subject to federal income tax withholding rules, but is subject to withholding for Social Security and Medicare taxes.

The IRS has published a Premium Table with instructions on calculating imputed income in Publication 15-B PDF.

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Definitions

Group-term life insurance
Combination of basic and any optional life insurance

Sources

Internal Revenue Code, Section 79; IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits