Reporting Taxable Amount of Life Insurance Premiums

1 Process the Life Insurance Premium Taxable Amount Through a Payroll within the Calendar Year.
2 Processing a Life Insurance Premium Payment That Was Not Processed Through Payroll
- 2.1 Option 1- Medicare Paid by Employee and Board
- 2.2 Option 2 -Full Board Paid Medicare

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 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.

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.
1. Calculate the excess life insurance coverage provided above the $50,000 limit.
  - Life Insurance Amount Provided - $50,000.00.
2. 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.
3. 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.
4. Annual cost is calculated by the value calculated in Step 1c X Number of months the life insurance coverage was in effect.
5. Cost to be reported on the employee’s W2 is calculated by the Annual cost calculated in Step 1d X Step 1b.
Include the calculated amount in Step 1 on the employee’s W2, either as a Life Insurance Premium Payment through a Payroll or manually with Core/Adjustments.

A 35 year old employee receives $250,000.00 of board paid group term life insurance for an entire calendar year. The amount of excess coverage over $50,000.00 is used to determine the taxable coverage. In this example the amount of taxable coverage would be $200,000.00.

$250,000 - $50,000 = $200,000

Using this same figure, it must be determined how many thousands of dollars are involved.

$200,000.00 / $1,000.00 = 200

This figure will be used later to determine the annual cost. IRS Publication 15-B gives the cost per $1000.00 of protection for a 1-month period. The cost for this 35 year old is .09 per month. This must be multiplied by the number of months the coverage was in effect.

.09 x 12 = $1.08

The non-cash earnings amount is calculated by taking the number of thousands and multiplying it by the factor calculated in the previous step.

$1.08 x 200 = $216.00

Process the Life Insurance Premium Taxable Amount Through a Payroll within the Calendar Year.

1. Go to Payroll>Payroll Payments-Future, or Payroll Payments-Current.

2. Click Create.

3. Enter the following:

Employee - Select the appropriate employee from the dropdown
Compensation - Select the appropriate compensation from the dropdown
Description - Life Insurance Premium
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 premium amount
Applies For Retirement - Uncheck the checkbox
Retire Hours - Leave blank
Supplemental - Leave unchecked
Supplemental Tax Option - None
Click Save

Example of Payroll Payments-Future entry:

Example of Payroll Payments-Current Pay entry:

This pay type will be taxed according to the Federal rules and as follows:

Federal Tax, State Tax, or OSDI Total Gross and Applicable Gross are increased but withholdings will not be withheld.
Medicare or Social Security Total Gross and Applicable Gross are increased and withholdings will be calculated when the payroll is initialized.
City Total Gross and Applicable Gross 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, or you can choose to add and error adjustment for the tax withholding due.
- 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.

4. Complete the payroll.

Processing a Life Insurance Premium Payment That Was Not Processed Through Payroll

If the Life Insurance Premium Pay Type was not used prior to the last pay for the employee, the Life Insurance Premium (NC1 in Classic) payment amount must be entered manually. This insures the life insurance premium amount will show correctly on the W2 form.

1. Go to Core>Adjustments, click Create

Employee = Locate the employee by name or id
Payroll Item = 001-Federal Tax
Type = Life Insurance
Transaction Date = Enter a date within the current posting period
Amount = Enter the amount of the Cost of Life Insurance calculation
Description = Can be added if desired
Click Save

The Total Gross and Applicable Gross fields will be updated for the Federal, State, City (if the "Tax Non Cash Earn" field is checked on the city tax record found on the Core/Payroll Item Configuration screen), OSDI, and Medicare. This is reflected on the W2 Report. When the employee files their city taxes, they will owe city tax (if applicable) for the life insurance amount not paid through the system.

When the Life Insurance Adjustment is added, each OSDI Payroll Items> Applicable Gross is increased by the life insurance 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 Adjustments to reduce the OSDI's Applicable Gross accordingly should be entered. The Applicable Gross for 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

Go to Core>Adjustments and create an adjustment for a negative value to adjust the Applicable Gross according to the calculations above.

A 'Difference in Adjusted Gross' will show for the Life Insurance Payments on the Quarter Report.

Option 1- Medicare Paid by Employee and Board

2. Medicare withholding must be paid. Create adjustments for the Medicare payroll item(s). Board will need to pay for both Employee and Employer portion of Medicare and employee can reimburse the district.

If the employee is responsible for paying their portion of Medicare, the following adjustments will need to be created:
- Go to Core>Adjustments, 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 the missed Medicare Withholding
  - Description = Missed Life Insurance Payment
  - Click Save
- Go to Core>Adjustments, 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 the missed Medicare Withholding
  - Description = Missed Life Insurance Payment
  - Click Save
- Example:
  Life Insurance amount of $216.00 x .0145 = $3.13
  $3.13 Amount Withheld for 692
  $3.13 Board's Amount of payroll item for 692

Option 2 -Full Board Paid Medicare

2. If the Medicare is fully board paid (referred to as Medicare Pickup), then the following adjustment will need to be created. Medicare withholding must be paid. The Board will need to pay for both Employee and Employer portion of Medicare.

Go to Core>Adjustments, click Create
- Employee = Locate the employee by name or id
- Payroll Item = Medicare Tax
- Type = Board’s Pickup Amount of Payroll item
- Transaction Date = Enter a date within the current posting period
- Amount = Enter the amount of the missed Medicare Withholding
- Description = Missed Life Insurance Payment
- Click Save
Go to Core>Adjustments, 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 the missed Medicare Withholding
- Description = Missed Life Insurance Payment
- Click Save
Go to Core>Adjustments, click Create
- Employee = Locate the employee by name or id
- Payroll Item = Medicare Tax
- Type = Applicable Gross
- Transaction Date = Enter a date within the current posting period
- Amount = Enter the amount of the missed Medicare Withholding
- Description = Missed Life Insurance Payment
- Click Save
Example:
Life Insurance cost is $216.00
$216.00/ 98.55% = $219.18 Applicable Gross.
$219.18 (life insurance) x .029 (.0145 x 2) = $6.36 Medicare Pickup Amount.
$3.18 ($6.36/ 2) for each, the Employee (being paid by the board as pickup) and Employer amount.
$219.18 - $216.00 = $3.18 Applicable Gross Adjustment
$3.18 Is the amount of the Board's Pickup Amount of the Payroll Item. This will update both Medicare Pickup for $3.18 and Medicare for $3.18 on the Employee's W2.
$3.18 Is the amount of Board's Amount of payroll item. This will update the 941 Quarter report 'QTD Employer's Medicare Contribution.'
$3.18 Is the amount of Applicable Gross. This will update the employee's W2 Taxable Gross for Medicare.

Effects of the Life Insurance and Medicare Adjustments to the Quarter Report:

Life Insurance Adjustment on the Federal Tax Payroll Item -($216.00 in this example).
- Individual Employee *TD Taxable Wages
- 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 - ($3.18 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 - ($3.18 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
Applicable Gross of payroll item on the Medicare Tax Payroll Item - $3.18 in this example).
- Updates to the Quarter Report
  - Line 5C) QTD Employees' QTD Taxable Wages x 1
  - Only for Employee’s Over $200,000
    - Line5D) QTD Medicare Taxable Wages Subject To Additional Withholding
Only for Employee’s Over $200,000:
- W2 Report - to remove ‘Warning: Possible Medicare discrepancy detected for amount over 200,000. Amount calculated = $xxxx.xx’
  - Board’s Pickup Amount of Payroll Item - YEAR TO DATE ONLY, on the Medicare Tax Payroll item -Example: $216 x .9% (0.009) = 1.94 cents (0.90)
    - Update W2 report for employee:
      - 692 Medicare
      - Medicare Pickup